401(k) Match Suspensions May Cost Workers $13 Billion Over Next Year

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Updated on Tuesday, August 4, 2020

Workers in nearly every industry have been impacted by the coronavirus pandemic, with the unemployment rate hitting a new high in 2020 of 14.7% and pay decreases becoming typical.

Now, a study from MagnifyMoney estimates that workers may lose $13 billion over the next 12 months as employers suspend matching contributions to 401(k) and other defined contribution plans. At retirement, that would cost workers a total of $58.8 billion based on a 6% annual return.

According to a Plan Sponsor Council of America (PSCA) survey of employers, 16.1% of respondents indicated they were planning to suspend company-match programs this year amid the coronavirus crisis.

Key findings

  • Workers may lose $13 billion in matching contributions to their 401(k) and other defined contribution plans over a 12-month suspension should 16.1% of employers suspend retirement benefits. To put that into context, the company-match losses would be more than twice as costly than the $5.7 billion Americans lose annually to early withdrawal tax penalties (prior to 2020).
  • The average company match lost to a 12-month suspension — which is estimated to impact 11.4 million workers — would be $1,134.
  • While younger workers typically have lower wages (and thus a lower match), the suspension hits them hardest, as they lose the opportunity to grow that match over their career. At a 6% compound annual growth rate, losing a $1,000 match at age 25 would mean $10,903 less in retirement at age 65.
  • A 30-year-old millennial with a median income of $40,000 potentially has more to lose at retirement from a suspended company match than Generation X and baby boomer co-workers, despite the lower income. At a 6% compound annual growth rate, the $1,106 match they lose would have grown to $8,504 at age 65. The lost match of $1,338 for a 54-year-old Gen Xer with a higher income of $51,571 grows only to $2,540 when they turn 65.

Millennials hit hardest by 401(k) match suspensions

More than 58 million Americans were active 401(k) participants in 2018. By the end of the first quarter of 2020, 401(k) plans held an estimated $5.6 trillion in assets. Now, as more employers are set to suspend matching 401(k) plans, many Americans will have less money going into those plans.

Many millennials entered the workforce during the Great Recession, when they experienced diminished job prospects and depressed wages that left them challenging obstacles at a young age. Now, they face another blow from an unprecedented economic disruption. While millennials would lose less ($4.9 billion) in a year from company-match suspensions than Gen Xers ($5.4 billion), they would have a lost opportunity cost almost three times higher than Gen Xers because they have more years until they reach retirement age.

At a match rate of 3% total, millennials may miss out on $29.7 billion in lost opportunity cost, which is more than:

  • Gen Xers at $10.3 billion
  • Generation Zers at $5.1 billion
  • Baby boomers at $0.8 billion

Take a 24-year-old millennial, for example. If they have a median income of $27,000 and lose a company match at a 6% annual growth rate, that $710 lost match could grow to $7,745 by the time they reach age 65.

On the other side of the millennial spectrum, a 39-year-old with a median income of $50,000 would see an average loss of $1,341 — or $6,101 by retirement age.

Since employers are only required to give 30 days’ notice before reducing or suspending contributions, some workers may lose their matches sooner rather than later.

How other generations are affected by 401(k) match suspensions

No generation will be immune to the financial toll of the coronavirus pandemic. As the youngest adult generation in the workforce, Gen Zers have lower median salaries, with longer to work before retirement:

How much suspending retirement account matches for 1 year costs workers

AgeMedian incomeMatch suspensionPotential returns on suspended matchTotal potential loss at age 65
20 (Gen Zer)$14,438$380$4,849$5,229
25 (Millennial)$31,000$858$7,969$8,827
30 (Millennial)$40,000$1,106$7,397$8,504
35 (Millennial)$46,000$1,234$5,852$7,086
40 (Gen Xer)$47,500$1,275$4,196$5,471
45 (Gen Xer)$50,100$1,300$2,869$4,170
50 (Gen Xer)$50,200$1,303$1,820$3,123
55 (Gen Xer)$50,000$1,140$902$2,042
60 (Baby boomer)$50,000$1,140$386$1,526

MagnifyMoney calculations assume a compound annual return rate of 6% and a 12-month matching suspension based on a typical company match of 50% of the first 6% of employee contributions, or 3% total

  • At a match rate of 3% total, 913,000 Gen Z employees would face $444 million in lost matches in the next year and $5.1 billion in lost opportunities by age 65. A 20-year-old with a median income of just over $14,000 may lose just $380 in match suspension in a year, but — over time — that figure could have grown to $5,229 by the time they hit 65.
  • A 45-year-old Gen X employee may have a higher income of $50,100 and a lost match of $1,300. By age 65, however, that figure could have grown to $4,170. Gen Xers stand to lose a total of $10.3 billion in opportunity cost.
  • The 1.9 million baby boomers facing match suspensions will lose $2.2 billion in matches and $783 million in opportunity cost. A 60-year-old making $50,000 would lose $1,140 in a year, totaling just $1,526 lost when they reach retirement in five years.

Why saving for retirement earlier matters

Ken Tumin, founder of DepositAccounts, said it’s crucial to save early for retirement. “Starting early gives you a big advantage in building sufficient retirement savings for financial independence,” Tumin said.

He also said that, during a pandemic, 401(k) account holders may need to adjust their contributions if they face unexpected expenses or reduced income. Expect the unexpected by paying down debts and budgeting for an emergency fund, he said.

To recap, here are the reasons why saving for retirement early matters:

  • Build compound interest: Contributing even a small amount to your 401(k) will add up over time, potentially resulting in thousands of dollars saved by the time you retire.
  • Provide flexibility: If you’re going through a financial rough spot, starting early may allow for more flexibility to temporarily contribute less. If you seek additional help, you can find a financial advisor.
  • Prepare for income fluctuations: By setting aside money early, you’ll continue to watch your money grow even if you lose a job, are furloughed or are facing a pay cut.

Methodology

In May 2020, MagnifyMoney estimated the impact that company-match suspensions may have on American workers during the COVID-19 pandemic, based on recent surveys, income levels and participation rates of workers with access to 401(k) and similarly defined contribution retirement savings plans. Wage, contribution and match estimates are based on data from the Bureau of Labor Statistics (2019), the 2018 American Community Survey by the U.S. Census, the Plan Sponsor Council of America (2020), Fidelity Investments and Vanguard (2019) and the Stanford Center on Longevity (2018). Assumptions are based on a typical company match of 50% of the first 6% of employee contributions, or 3% total. Calculations presume a 12-month company-match suspension and a 6% compound annual growth rate.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.