In my last post here at PFA, I detailed four compelling reasons to keep feeding your 401(k) account during these admittedly trying economic times.  In most cases, I believe that advice is sound.  Don’t give up on your 401(k).

However, there are exceptions to every rule.  That’s what this post is all about.  Last time I promised I’d address a few caveats to the general rules favoring 401(k) participation.  Here they are:

Disappearing Employer Contributions. Times are tough enough that many employers are bailing out on their longstanding 401(k) matching policies.  As companies look for ways to cut costs and to remain competitive, they’re looking very carefully at their contributions to employee retirement accounts.  Chicago’s Southtown Star reports that General Motors is already pulling the plug on some matching and that other companies will undoubtedly be following the auto giant’s move.  If your employer is eliminating or suspending 401(k) matching, you might need to take a close look at your situation.

In many cases, a chief reason to prefer 401(k) participation is the employer match.  When you remove that money from profitability calculations, the overall picture can change dramatically.  Employer contributions crank up your assets when the market is humming and they act as a kind of hedge when things go bad.  Run the numbers if your employer is bailing out on you and make sure that feeding your fund still makes sense.

Bad or Negligible Choices. As we mentioned last time, one of the reasons to love 401(k)’s relates to their flexibility.  Employees generally have a slate of choices regarding what kind of instruments and investments go into their 401(k) wrappers.  Unfortunately, many companies have greatly reduced or eliminated choices in hopes of streamlining and increasing administrative efficiency.  The Curious Cat Investing and Economics Blog, which concurs with my assessment that 401(k)’s are generally a good idea explains, “[n]ow there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds…”

That might not be a deal-breaker for most people, but if your 401(k) options are over-limited and force you to retain positions that appear incredibly weak or doomed, you might want to reconsider your participation.  At the very least this could justify a reduction in contributions.

Pressing Debts. Recently, we discussed the age-old question of whether it makes more sense to invest or to pay down existing debt.  The bottom line?  It depends on the nature of the debt and the value of the investment.  Making the right decision in this regard requires a holistic perspective.

If you’re facing high-interest debts and are still contributing significantly to a weakened 401(k), you might want to re-think your priorities.  You may be able to get more mileage out of your cash by applying it directly to your debt load instead of socking it away for your retirement.  This is particularly true in current market conditions.  Your debt continues to accrue the same (and in the case of some debts, very high) interest obligations even when the likely return on investments is tanking.  If you haven’t looked carefully at your debt situation relative to the earnings levels of your 401(k), this might be a great time to do so.

These are three factors that could form a strong argument for adjusting your 401(k) activity.  However, it is important to remember the strong general argument in favor of feeding your retirement accounts.  Consider any changes very carefully and don’t allow your emotions during a high-stress economic period to lead you in the wrong direction.  Additionally, make any and all decisions with a clear understanding of all possible repercussions.  For instance, you need to take the tax advantages of a 401(k) into consideration, your own personal habits and “money psychology” and the fact that the current down market may very well represent an opportunity to acquire value stocks at a temporarily reduced price into consideration.

Most people will find that 401(k) participation makes sense.  Some, however, may discover that it’s time to pull the plug on their current contribution strategy.