Understanding How Employers May Change Your Retirement Fund
MICHEL MARTIN, HOST:
Now we turn from government finance to personal finance. As fewer and fewer American workers receive traditional pension benefits, many are looking to 401(k)s to support them after they leave the workforce. The U.S. Department of Labor estimates that 88 million Americans now have these accounts. But now some employers are changing the way those accounts are handled, and that could force workers to reassess how to prepare for retirement.
Now this issue made headlines most recently when AOL moved to restructure its 401(k) plan. Although that policy change was reversed after a public outcry about the way the change was explained. Other companies are moving ahead with similar changes. We wanted to talk more about this, especially what you can do if you work for a company that is making these kinds of changes. So we've called money coach Alvin Hall to give us a few pointers. Alvin, welcome back.
ALVIN HALL: I'm so glad to be here to talk about this subject.
MARTIN: Well, why this subject?
HALL: Because I think it represents a cultural shift in America. There was a sort of tacit agreement between the workers and the corporations that if we work for you, we provided services, you would help us plan for our retirement. And therefore, we could eventually, at age 60, 65, or whatever, have a comfortable living for our golden years. It seems to be now that corporations are looking at this and saying, well, we don't have to quite do that for our employees.
MARTIN: Well, you know, 401(k)s have long been touted as a big improvement over traditional defined benefit pensions. The argument being that sometimes you had to work for a company for a really long time in order to get a pension.
HALL: That's right.
MARTIN: And that it was tied to working for that company. So if you left the company before retirement, you didn't necessarily get anything. And this way, the idea is these are portable. And it's kind of you put some skin in the game, I put some skin in the game. So what is the problem here?
HALL: The fact that corporations are looking at 401(k) plans as a part of their overall restructuring and reducing the expenses of the company. So when they say, oh, we're going to cut back on the cost of labor in this company, part of that cost of labor will be a reduction in the 401(k).
So what a lot of companies have started to do, they've gone from matching at 1 percentage and dropping that to a lower percentage than before. And they cite a lot of reasons for this. The one I just talked about - the profitability of the company. Another one they talk about is the competition in the marketplace. I think that's an interesting use of the term because, in many cases, there are so many people applying for jobs that they realize that we don't have to offer these gold-plated benefits we did before. We can offer less benefits, and people kind of have to accept them.
MARTIN: Well, what are some of the changes specifically to 401(k)s that we're talking about here? So you mentioned one is reducing the company match. Are there others?
HALL: Yes. They're delaying when they pay the match into the 401(k) plan. Typically, every two weeks or every month when you receive your paycheck, the money goes in. So over time you get to benefit from dollar cost averaging. However, now they're either going to make that payment at the end of the year or at the beginning of the next year. So if you leave the job before that payment is made, you don't get that money.
MARTIN: Anything else?
HALL: Yes. They're changing the vesting periods. Typically, in most 401(k) plans, you invest over a reasonable period of time. Some of them are extending that so that you will get your money over a longer period of time.
MARTIN: Well, what does that mean? That means that you have to work there a certain number of years before you get the company match? Or it means you have to work there a certain number of years or you don't get the company match at all?
HALL: Exactly. In some cases, you typically vest, let's say, over a five-year period. So the first year you work, you get 20 percent. The next year you get 40 percent what's in the plan, the next year 50 percent. So over time, it means that you are getting more of the money that's in the plan that belongs to you. If they extend that, you are disadvantaged.
MARTIN: But you still get the money you've invested, right? So what...
HALL: Yes, you get the money you've invested but not the match.
MARTIN: But you're not getting - what we're talking about here is the amount that the company is contributing toward or matching or investing in the plan, you know, from there.
MARTIN: So are there any regulations that govern this? I mean, do companies...
HALL: Oh, yes.
MARTIN: ...Have a free hand to make these kinds of changes, or are there regulations that govern whether they can do this or not?
HALL: There is the ERISA, the Employee Retirement Income Security Act passed in 1974 to hopefully, at the time, look at pension plans and make them more fair for the working people. However, everybody's looking at the law these days and determining how can we change this? How can we shift it but still be in compliance with ERISA?
MARTIN: So let's say you're an employee at a company that is making these kinds of changes. What can you do?
HALL: First of all, it's very difficult for you to make up for what is essentially a raise when they match you at a certain level. The old ways of thinking about this was if you don't sign up for that 401(k) plan and they give you a 3 percent match, then you're giving up a 3 percent raise. You're also giving up a 3 percent return on your money. So one of the things you can do if you're not participating in the plan to the full extent that you can, up it.
Increase it to the maximum you can, even if they're not matching it because the money will still come out of your paycheck. If you are at the max, then you may need to look at another way of putting money away for retirement. Look at IRAs. IRAs have income limits. If you are not at a certain level of income, gross adjusted income, then you can make contributions toward your IRA that are tax-deductible. And you may want to put money into other saving vehicles. The idea is that you have to make up for some of the shortfall yourself. And there's one other thing we can talk about, Michel, and this is a hard one to discuss.
You may have to take on a tad more risk than you may be comfortable with because you're effectively getting an additional 3 percent return on your money. How are you going to make up that 3 percent if the company takes away that match? How are you going to do it? That means when you invest your money, you may have to look at types of securities that involve a little more risk so that you get a little higher return.
MARTIN: And you also talked a lot about timing. You said that some of the companies are - this is one of the things that upset the workers at AOL.
MARTIN: That wasn't the only thing, but this is one of the things was that the company is changing to yearly contributions that would only be paid at the end of the year. And if you left the company before that - so presumably that would mean that you should time your retirement to after that contribution has been made if you have the choice to do that.
HALL: It's not only timing your retirement, it's timing when you want to leave the job so that you won't leave money on the table. Leaving at the wrong time - you can say, oh, I'm leaving just $1,500 or $2,000 or $2,500 on the table. But you know what? Overtime, that adds up to be a lot of money if you look at the effect of compound interest or compound investment return on that money.
MARTIN: Your argument is that one of the reasons that companies are taking these steps is that they can. I mean, they feel more competition for these positions so, therefore, they look for ways to save money where they can. And if they can renegotiate these benefits or the paying of these benefits in whatever way they offer these, then they're willing to do that. Is this the kind of thing that you could negotiate are generally not?
HALL: You don't have any individual choice in the matter at all. The workforce is divided between the highly compensated, the people at the top, and the rank-and-file. If you're a highly compensated individual, you can go in and say I want part of my compensation paid tax-free. I want money put aside for me, for my retirement. You can negotiate it. But as a rank-and-file, you accept a blanket policy. I think it's important for the average worker to realize that these types of changes underlined the necessity for financial literacy. You can't assume anymore that the corporation is going to do the right thing and provide a way for you to easily take care of your retirement. You need to educate yourself about retirement planning so that you can be proactive, so that you can offset the negative effect of some of these changes.
MARTIN: Alvin Hall is an author and financial educator. He joined us from our studios in New York City. Alvin, thanks so much for joining us once again.
HALL: You're welcome.