Employer-matched 401(k) plans have been a reason for people to switch jobs for a long time. People are interested in this choice because saving for retirement has become too hard for individuals to do on their own in a world where pensions are going down and Social Security benefits are not enough to cover costs.
Even though these match contributions are supposed to make things easier, a lot of workers can not use them. Because of things like rising costs of living, stagnant wages, and extra costs, workers may choose to keep their whole paycheck that goes into a retirement account, even if the benefits are worth it in the long run.
The new change to 401(k) match by the IRS
An unknown company asked the Internal Revenue Service (IRS) to change how this match works because many of their workers do not use the 401(k) program, . According to Fidelity, about 22% of employees do not claim their full employer match on 401(k) plans.
In particular, they wanted to be able to move the money from the traditional 401(k) accounts to accounts that would pay off school loans or cover medical costs.
This may seem like an unusual idea, but it has been brought up before. This is just the first time that the IRS has given permission for the change to happen.
Employees of the unnamed company can now choose at the start of each year whether to put some of their previous 401(k) match toward paying off student loans or putting money into a health repayment account to help pay for medical bills.
People will simply have the money sent to their retirement account if they do not make a choice.
If this idea spreads to more companies besides the first pioneering, unnamed company, it could be a draw for many workers, especially younger people with a lot of student loan debt or older people who know they will have health problems when they retire.
The downside of moving 401(k) contributions away from retirement
It is hard to save for retirement, and now that Social Security is going to have a gap soon, it will be up to Americans to make sure they have enough savings to live on after they retire.
This means that they should save some of their income for retirement as soon as possible, especially if their company will match that amount.
People who save this money over the course of their job will also benefit from compound interest, which lets their money grow over time and keeps them from having to compound their contributions near the end.
The Federal Reserve says that the average amount of money saved for retirement by houses with people aged 55 to 65 is $185,000. This is not even close to enough to cover their needs.
Another argument against this method is that getting rid of debt is always a good way to save more money. People who pay off their medical or student loan debt quickly can save money on interest and get rid of their debt faster.
This would free up more money in the future that can be saved for retirement without having to worry about monthly payments.
This is especially true if the workers are not using the employee match at all because they are having trouble making ends meet. This means they are leaving money on the table that they can not get.
The Federal Reserve has said in the past that one in four Americans have nothing saved for retirement. This includes 27% of those who are already retired, and many of them also have debts they need to pay off with their limited Social Security income.
Incorporating different types of contributions could help the economy and help millions of Americans save for retirement.