What's Happening with 401(k)s?

Starbucks has announced that it is no longer matching employee contributions to their 401k plan. Fed Ex and Motorola have said they'll do the same. Smaller companies have or will follow suit. The reason, of course, is the economy. Employers are no different from individuals; in lean times they have to cut costs and cutting contributions to the 401(k) retirement plan is an easy call.

So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.

Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.

Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).

Estate Tax to Continue

President-elect Barack Obama announced recently that he intends to continue the estate tax (dubbed the "Death Tax" by opponents) instead of letting it expire in 2010 as originally planned by the new Bush administration in 2001. Under the current provisions of the estate tax, estates over $3.5 million are taxed at 45%. Estates under $3.5 million ($7 million for married couples) are exempt from the tax. However, there is no guarantee the Obama administration will maintain the estate tax at this level. During President Clinton's administration, estates over $1 million were taxed at a 55% rate; President Bush increased the exemption gradually, with a proposed phase out completely next year.

The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.

While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.