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 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.
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, Americans will be without one way to save for retirement.
After many millennials entered the workforce during the Great Recession, they now 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.
In total, at a 6% match rate, millennials may miss out on $29.7 billion in lost opportunity cost, which is more than:
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 â€” or $6,101 by retirement age.
Since employers are only required to give 30 daysâ€™ notice before reducing or suspending contributions, some workers may lose their matches sooner rather than later.
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:
Ken Tumin, founder of DepositAccounts, said itâ€™s crucial to save early for retirement. â€śStarting early gives you a big advantage in building sufficient retirement savings for financial independence,â€ť 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:
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.