401(k) has advantages even if employer cuts match

— -- Your employer has canceled bagel Mondays, and the lavender hand lotion in the bathroom has disappeared.

When you report a computer problem to IT, someone shows up at your desk with a roll of duct tape.

Given the severity of the downturn, employees have learned to live with a certain amount of corporate belt-tightening. But cutbacks in matching contributions to your 401(k) plan are much harder to stomach.

More than a quarter of large companies have suspended matching contributions to their employees' 401(k) plans or plan to do so in the near future, according to a survey by CFO Research Services and Charles Schwab.

The company match has always been a powerful incentive for contributing to a 401(k) plan, at least up to the match. But what if there is no match? Should you still contribute?

In most cases, the answer is yes. Some reasons:

•The suspension is probably temporary. During the last recession, in 2001, "Every single company that suspended their match reinstated it, unless they went out of business," says David Wray, president of the Profit Sharing/401k Council of America. Companies that don't restore matching contributions when the economy recovers will have a hard time attracting talented workers, employee benefits consultants say.

But the new matches may not look like the old ones. Some employers are expected to link matches to company profits. Others will reduce the size of the match when they reinstate it, says Bill McClain, a defined contribution consultant for Mercer.

•Advantages over an IRA. Your 401(k) plan may offer benefits you can't get in an individual retirement account.

If you don't receive a match, you may wonder whether you're better off investing your savings in a Roth IRA instead of your 401(k) plan. Contributions to a Roth are after-tax, but withdrawals are tax-free, as long as you've owned the Roth for at least five years and are 59½ when you take the money out.

The Roth could be a better choice for workers who are stuck with a 401(k) plan that offers no match, high fees and lousy funds. But if you work for a large company, the slate of mutual funds in your 401(k) plan is probably superior to what you can find on your own, says Byron Beebe, U.S. retirement market leader for Hewitt Associates. Large 401(k) plans can invest in institutional shares of mutual funds, which typically charge lower fees than retail versions of the same funds.

You can also save more in a 401(k) than you can in a Roth. If you're younger than 50, you can stash up to $16,500 in a 401(k) plan this year. Workers 50 or older can contribute up to $22,000. By contrast, the maximum you can invest in a Roth IRA is $5,000, or $6,000 if you're 50 or older.

Making up for losses

When employers reduce their contributions to 401(k) plans, Beebe says, employees have no choice but to save more. Otherwise, they risk not saving enough for their retirement.

Unfortunately, workers 55 and older are contributing less to their 401(k) plans, according to an analysis by Mercer.

Those workers have, on average, decreased their pretax contributions from 9.2% in September 2008 to 8.8% in April, according to an analysis by Mercer. Only 8% of 401(k) participants over 50 took advantage of catch-up contributions last year, Mercer said.

That's troubling, because workers in that age group don't have much time to recoup their losses before retirement, McClain says. Stellar investment returns would help, but in this economy, tying your destiny to the stock market is a questionable strategy.

In addition, you need to invest aggressively to get above-average returns, and most older workers can't afford to take big risks, McClain says.

Absent investment returns, the only way to recoup losses is to step up contributions. Workers 55-plus who are saving 8.8% of pay would need to save more than 25% a year to recoup their losses in two years, or 15% a year to recoup their losses in five years, according to Mercer.

The loss of a company match makes the task of rebuilding retirement savings even more difficult, which is why many older workers will need to work longer.

"Whether consciously or subconsciously," McClain says, "that's the option most people are facing."

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: sblock@usatoday.com. Follow on Twitter: www.twitter.com/sandyblock