Rescuing Your Retirement: How to Handle Your 401(k)

July 7, 2009 — -- Employers around the country are dropping their matching 401(k) contributions and that means less money is going into your retirement savings.

According to a recent survey by Charles Schwab and CFO Research Services, 25 percent of companies have either suspended their match or are thinking about doing it. These companies include household names like Starbucks and HP.

But there's also good news. A recent Watson Wyatt study shows that 50 percent of companies are looking to reinstate their match in the next 12 months.

The way they give the contributions will probably change. Twenty-five percent of the companies in the Watson Wyatt study said that their contributions will now most likely be linked to company profits. So, future matching is not guaranteed, and this may stop some people from contributing.

Find out how you should deal with the differing 401(k) climate below.

Should you stop investing if your company stops matching your contribution?

No, even if your company has stopped matching your 401(k) or has diminished the match for your 401(k), I always recommend that you should continue to contribute as much as possible.

Do not stop contributing.

First of all, 401(k) contributions are tax-deferred. Secondly, by not investing right now, you will not be taking advantage of compounding, which greatly increases your earning potential.

And even though recent surveys show that a quarter of companies have either suspended their match or are thinking about it, other studies show that 50 percent of companies are looking to reinstate their match in the next 12 months. So that match is likely to come back.

In the meantime, save more now, if you can. According to research, most employees can bridge the gap a 401(k) match suspension creates by upping their contribution by 3 percent a year.

If I'm not going to get that company match anymore I should just cash out? Is that a bad idea?

It's a very bad idea. Dipping into your 401(k) before maturity can be disastrous. Fidelity ran the numbers and found that a person with $50,000 in retirement savings who also makes $50,000 a year would lose nearly half of his or her 401(k) investment to taxes and penalties, and be left with only $29,000 if they withdrew their entire savings.

And according to research, about 45 percent of employees cash out their 401(k) plans when they leave a job or are laid off.

What should I do if I don't like the options in my 401(k) plan now that my employer isn't giving me an incentive to put my money into it?

As a last resort, if your employer has eliminated your match, and you don't like the options in your plan, then you can put some of your contributions into an IRA: $5,000 a year is the limit, unless you're 50 or older and then you can put in $6,000 a year.

If you're young, put the money in a Roth IRA and if you're older, into a traditional IRA. This will help you save on taxes in the long run.

Mellody Hobson, president of Ariel Investments in Chicago, is "Good Morning America's" personal finance expert. Click here to visit her Web site, www.arielinvestments.com. Amar Parikh, director of corporate affairs for Ariel Investments, contributed to this report..