401k Is Now the U.S.'s Leading Private Retirement Plan

WASHINGTON, DC, November 6, 2006 -- As the 401k plan turns 25, a new study by the Investment Company Institute finds that these defined contribution savings plans have become a mainstay of America's retirement security.

November 10, 2006, will mark the 25th anniversary of the 401k plan. Originally viewed as a supplement to traditional workplace pension plans, 401k plans now have 47 million active participants-more than twice the 21 million who participate in private-sector defined benefit pensions. 401k plans held $2.4 trillion in assets in 2005, compared to $1.9 trillion in assets in all private-sector defined benefit pensions.

Yet 401k plans had to overcome stiff headwinds from Washington to reach their current size and promise. The ICI study points out that in 1982, a worker and employer could make a total combined contribution of $45,475 a year. Then Congress, concerned about the impact on the federal budget from deferring taxes on 401k savings, reduced the combined limit to $30,000 in 1983 and effectively froze it at that level for 17 years. Despite recent legislative efforts to encourage saving for retirement, in 2006, the combined contribution limit is $44,000-less in nominal dollars than the 1982 level.

"The 401k system has thrived despite complex rules and an often unfriendly climate in Washington," says ICI Senior Economist Sarah Holden, who coauthored the paper with Senior Economist Peter Brady and Assistant Counsel Michael Hadley. "The fact that it has grown to today's scale, in the face of those limitations, is testimony to the advantages that workers and employers see in this flexible and innovative retirement savings plan."

Other findings from ICI's paper:

• While 401ks were first offered as supplements to traditional pensions, the latest data shows that 90 percent of 401k plans are the only retirement plan offered by that employer. In 2002, some 350,000 employers offered 401k plans as their sole retirement plans. Three-fifths of those stand-alone plans were started in 1995 or later.
• The growth in 401k plans generally has been fueled by changes in the economy and the workforce-not by companies dropping traditional pensions in favor of 401ks. In particular, newer firms have tended to adopt 401k plans. Because traditional pensions generally favor employees with long service with one company, younger workers tend to place more value on defined contribution pension benefits.
• Mutual funds account for roughly half of the assets in 401k plans. Mutual funds have been instrumental in opening securities markets for workers participating in 401k plans, offering diversified investments, professional management, and innovative plan services.
• 401k plans offer a powerful savings tool that can provide significant income in retirement. In research with the Employee Benefit Research Institute, ICI has found that more than half of today's young 401k participants can expect to retire with enough 401k assets to replace more than half of their pre-retirement income.
• The Pension Protection Act, passed in August, offers the potential to sharply increase 401k participation and retirement income. The PPA makes permanent the updated 401k (and IRA) contribution limits; preserves catch-up contributions for workers age 50 or older; and encourages employers to offer automatic enrollment and better default investments in 401k plans.
• If companies fully implement the PPA's provisions, eligible workers can accumulate significant retirement income. In the lowest income group, the median eligible worker could replace 52 percent of pre-retirement income if companies implemented automatic enrollment with a default contribution of 6 percent of pay, invested in a lifecycle fund. That's up from a 23 percent replacement rate for the median worker without those reforms.

"The Pension Protection Act signals that the 401k system is and will remain fundamental to our national retirement policy," said ICI President Paul Schott Stevens. "As that system enters its second quarter-century, we must make sure that it continues to develop and reach its full potential."

ICI's paper, "401k Plans: A 25-Year Retrospective," and further information on 401k plans and ICI's 401k research can be found on this website: www.ici.org.

About Investment Company Institute

The Investment Company Institute, the national association of the U.S. investment company industry, is an authoritative source of information on the investment company industry, its shareholders and its economics, and on the U.S. retirement and education savings markets. For a complete list of ICI research publications and statistical releases, visit the Statistics and Research section of this website.

###

Click here for more material dealing with current trends, opinion, news, legislative action, investments, marketing, sales, consulting, and legal issues on 401k plans.

This is a press release provided by the company or its representatives. 401khelpcenter.com, LLC is not the author of this release and is not associated or affiliated with any firm or organization mentioned unless otherwise noted. Use of any information obtained from this release is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by 401khelpcenter.com, LLC.