Study: Plan Design, Demographics Affect Contributions To 401(k) Plans

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One particular finding leapt out at Sarah Holden when examining data collected for “Contribution Behavior of 401(k) Plan Participants.”

The senior economist with Washington-based Investment Company Institute was surprised to learn after looking at the 1999 401(k) contribution behavior of 1.7 million people that in significant numbers, older people tend to contribute more than their younger counterparts.

Holden, who co-authored the report with Jack VanDerhei, a Fellow with Employee Benefits Research Institute, a nonpartisan public policy research organization based in Washington, says there are two widely accepted theories on this phenomenon.

One is that people go through spending and saving cycles. In their younger years, they tend to spend on children and setting up a household, she says. When that cycle is over, they use the money for retirement savings.

“Also people don’t think about retirement when they’re really young,” Holden says. “They think about it more when it gets closer.”

Holden says this is the first time she undertook studying the 401(k) contribution habits of such a large cross-section of the population.

“Our agenda was to analyze and try to understand the factors that influence an individual’s contribution behavior,” she says.

The study finds that contribution rates vary widely according to demographics, plan design and contribution limits set by tax laws, Holden says.

According to the analysis, participants in 401(k) retirement plans contributed an average of 6.8% of their gross, pretax salaries to their retirement accounts in 1999. Workers make almost all of their contributions on a pre-tax basis, EBRI and ICI report.

EBRI and ICI analysts say they have confirmed earlier findings suggesting that contribution rates are higher when plans allow participants to borrow from their accounts.

Employer-matching contributions also increase average total contribution rates. The average total contribution rate was 10% of salary for employees in plans offering an employer contribution, compared with 7.4% for those in plans not offering one.

Plan-imposed contribution limits keep some participants earning more than $40,000 a year from contributing as much as the tax code allows, according to the report. When the EBRI and ICI researchers looked at workers in that income range who failed to reach the statutory contribution limits, it found that plan-imposed rules kept half from reaching the limits.

Older participants tended to contribute a higher percentage of salary than did younger participants, even after factoring out differences in salary and job tenure, according to the report.

“There has been a lot of academic and professional research on 401(k) contributions, most based on small samples and surveys, but this is the first that is based on plan recordkeepers’ data on 1.7 million individual participants tracking what real people actually do,” says Dallas Salisbury, EBRI president and CEO.

“This report sets a benchmark for conducting future research in 401(k) participant behavior.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 5, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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