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American commitment to retirement remains with the 401(k)
January 24, 2012 / 3:36 PM / 6 years ago

American commitment to retirement remains with the 401(k)

(Reuters) - Despite flat stock market returns in 2011, investors haven’t lost faith in their workplace retirement plans, according to two studies released on Tuesday by the Investment Company Institute.

In fact, 401(k) plans are becoming more popular, and fewer people stopped making contributions in 2011 than in the two previous years, according to the surveys. Only 2.2 percent stopped saving in the plans in 2011, compared to 3.4 percent in 2010 and 5 percent in 2009.

As pensions have disappeared, more employers have begun to offer workplace retirement plans, which allow workers to save directly from their paycheck. Employees often receive a company match for their contributions. An estimated 72 million Americans are now enrolled in the plans, and more than half of U.S. retirement assets - about $6.6 trillion - are in these accounts.

Of the 3,000 households surveyed by ICI, 65 percent had favorable impressions of 401(k) plans, despite flat market returns in 2011. That’s up from 64 percent a year ago and 63 percent in 2009.

Why? Because they make saving for retirement as painless as possible. Contributions are tax-free in a traditional 401(k) and they come straight out of one’s paycheck. “Knowing that they are saving paycheck by paycheck and that it is toward a long-term target makes many retirement savers less nervous about the stock market,” said Sarah Holden, senior director of retirement and investor research at ICI, an association of U.S. investment companies.

Workplace retirement plans like the 401 (k) are still a popular way to save, partly because they are also sponsored by government tax breaks. “We have seen overwhelming support for government tax incentives to encourage retirement saving,” said Holden.

Among the 401 (k)’s most appealing qualities are its tax benefits. More than 80 percent of households with workplace plans said the tax-deferred privileges their retirement funds receive are an incentive to contribute. When asked if they thought the tax benefit should be removed from the plans, 85 percent of respondents said no.

More than 45 percent of the respondents said they probably wouldn’t save for retirement without the plans. They also said the company 401(k) plans helped them better prepare by getting them to think more about saving for retirement.

However, many participants still don’t realize that they’re not saving enough. In recent years, a growing number of employers have begun to automatically enroll new workers into the plans. Most are saving only 3 percent when financial advisers recommend saving at least 12 percent to 15 percent a year, including a company match.

“People are still contributing, whether they are confident in markets or not,” said Robyn Credico, a senior retirement consultant at consulting firm Towers Watson. However, if they do not take care to create goals for their contributions to 401 (k) plans, they may be investing less than they should. “Many people are not paying attention, and they are not taking full advantage of what their companies may offer, like matched contributions,” said Credico.

Editing by Andrew Hay

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