Companies cutback 401k matching

January 13, 2009 12:00:00 AM PST
As the recession drags on, more companies are discontinuing a benefit many workers rely upon. Sears recently announced it will no longer match employees' 401k contributions. Many financial experts and investors are starting to wonder if 401k plans have outlasted their usefulness.

The collapse on Wall Street has certainly made opening one's 401k statement a stomach-churning event. Years of financial buildup are wiped out.

"It's definitely made me consider pulling out of my 401K with the market being so bad and just focusing those savings elsewhere," said Lara Jensen, a San Francisco resident.

What's more, Sears is the latest major company to suspend employer matching contributions, joining Fed Ex and U.S. Steel. For many employees in a company-sponsored 401k plan, a typical matching contribution is 50 cents per $1, up to 6 percent of the employee's contribution.

"It really is a disaster for young people in particular because they're not great savers by nature," said Kit Yarrow, Ph.D.

Yarrow is a consumer physiologist at Golden Gate University. She believes there could be far-reaching consequences if more companies decide to suspend matching contributions.

"The incentive for young people has been that matching funds that companies have been supplying to them and now without that, I think the incentive to save is going to be plunging," said Yarrow.

Many wonder if the 401k needs to be reworked or scrapped altogether.

The Obama Administration is considering mandatory enrollment of workers in retirement savings plans and guidelines for investing those savings that could protect older workers from stock market downturns.

But wealth management advisor Norm Boone, from Mosaic Financial Partners, says despite the volatility people are experience these days, the 401k is still the way to go.

"You get to save on the taxes that you put into it, so the government is in part paying for some of that contribution and it's growing tax free and there's just not that many other opportunities to do that," said Boone.

There's clearly no magic formula, but it's something everyone seems to be striving for in these tough economic times.