Protect Your Retirement Savings Without Your Employer's Help

Seven tips to protect your retirement savings as employers reduce contributions.

September 9, 2008, 7:22 AM

Feb. 17, 2009 — -- First, we killed your pension plan; now, we're taking away your 401(k) matching contributions.

That is, in essence, what corporate America is telling workers as dozens of employers rush to halt their contributions to employee retirement savings accounts as a way to weather the current economic storm.

Since June, more than 60 employers have announced they would reduce or halt entirely contributions to employee retirement plans, according to the Pension Rights Center. These employers include Motorola, UPS, FedEx, the Atlanta Convention and Visitors Bureau and A.H. Belo Corp., a newspaper company that once employed me.

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By doing so, these employers are reneging on their end of an implied deal by corporate America that made it easier for companies to escape from the burdens of traditional pension plans with the enactment of the Pension Protection Act of 2006.

That's why I say don't believe a thing your employer tells you about helping you save for retirement. Always assume you are on your own when it comes to accumulating a nest egg that will carry you through your later years.

Given that reality, let me suggest seven steps you might take if your employer is among those that have halted contributions to your 401(k) or other retirement savings plans.

1. Don't stop saving: The absolute worst response to a halt in retirement plan contributions by your employer would be to stop your contributions. Even though the incentive of an employer match has been removed, you still benefit by contributing to a 401(k) plan or other retirement savings plan.

The first benefit, of course, is the accumulation of funds to help you reach a day you will no longer need to work. But if you are young and have trouble thinking that far down the road, remember there is an immediate tax benefit to retirement plan contributions. For every dollar you direct to a 401(k) account, you can easily save 20 cents or more in state and federal taxes.

How to Save for Retirement

2. Save more: There's no getting around it. If your employer stops its contributions, you will need to contribute more to make up the difference. If your employer kicked in 3 percent of your salary, you should try to save 3 percent more. If you can't do it all at once, try bumping up your contribution gradually -- maybe by 1 percentage point of your salary once or twice a year.

The truth is you already should have been setting aside more than your employer unless your employer is unusually generous. Given the disappearance of traditional pension plans, the minimum combined employer-employee contribution to a retirement savings account should be at least 10 percent of salary.

If your employer is kicking in 2 percent, you can get away with an 8 percent contribution. But if your employer contributes nothing, then you need to count on setting aside at least 10 percent yourself. And if you are in your 50s or 60s and behind in saving for retirement, that figure should be higher.

The eventual goal for every worker should be to contribute the maximum amount allowed by law. For 401(k), 403(b) and 457 accounts, the maximum contribution is now $16,500 with an extra $5,500 allowed for those 50 and over.

3. Know your allocation: With less money coming from your employer, there is a smaller margin for error when it comes to investing your own funds. That means you should pay close attention to how you are investing your retirement savings. How much are you investing in stocks? In bonds? In cash?

Take the time to learn about the funds available in your plan. Don't look simply at recent performance. Make sure you know what asset classes each fund represents and how they fit into your asset allocation plan.

Not sure what your asset allocation plan should be? Take a look around the Web for the many asset allocation tools and models published by a variety of investment firms and sites. A classic moderate portfolio consists of 60 percent stocks and 40 percent bonds.

4. Lower costs: One sure way to make up for lost employer contributions is to lower your investment costs. Cut your annual portfolio costs by 1 percent, and you increase your rate of return by 1 percent.

Your success in cutting expenses will depend upon the funds available in your particular plan. Some 401(k) plans are loaded with lousy, high-fee funds; others feature stellar, low-cost index funds.

Study the expense ratios and 12b-1 fees. In the ideal world, your plan should feature index funds with expense ratios of less than .5 percent and no 12b-1 fees. In reality, that may not be the case. But just remember that studies have shown that funds with lower expenses tend to outperform those with higher expenses.

Other Retirement Savings Options

5. Consider a Roth-type plan: Over the long haul, you can make up for the lost employer contributions by investing in a Roth 401(k) or other Roth-type retirement plan. In recent years, many employers have begun to offer a Roth option under their 401(k) or 403(b) plans. With a Roth plan, there is no tax savings when you contribute, but you pay no taxes in retirement when the money is withdrawn. That can mean a higher income in retirement than if you had contributed to a regular 401(k) plan.

An online calculator from Charles Schwab allows you to easily compare the effects of contributing to a Roth 401(k) versus a regular 401(k).

If your employer does not offer a Roth-type plan, then look to a Roth IRA that you can set up on your own if your income does not exceed certain levels.

6. Set up an SEP: If you do any work as an independent contractor or operate a small side business, then consider setting up an SEP IRA account to shelter some of that income. A SEP IRA will lower the taxes you pay on self-employment income and possibly allow you to set aside even more money than you could with your employer's 401(k) plan.

Your total SEP contribution is tied to the net income generated by the business, but it's possible to direct as much as $49,000 into a SEP IRA this year. If your spouse works in the business, that figure can be doubled. Just be aware if you have any employees, you need to contribute on their behalf as well.

7. Hold them to their promise: Many of the employers now eliminating retirement plan contributions describe the move as temporary until business improves. That may well prove to be true, and within a few years, your employer again may be kicking in 3 percent or more of your salary to your retirement.

If contributions do not resume when times are good again, then start looking for a new job. Unless working for a startup, I say no worker should stick by an employer that contributes nothing to their retirement. Vote with your feet when there's a better destination you can reach.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at

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