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When Times Get Tough, Workers Start Saving Contribution Rates to 401(k)s Rise

August 13, 2008
Related Topics: Retirement/Pensions, Workforce Planning, Latest News
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Just when it seems workers have a pretty good excuse to scale back on their 401(k) contributions, many people are actually upping the ante and putting a greater share of their earnings into company-sponsored retirement plans.

Workers who participated in 401(k) plans in both 2007 and 2008 have kicked up their contributions by 7 percent this year, according to new data from Fidelity Investments. That’s a notable increase in any year, let alone one in which major equity markets have tumbled by almost 15 percent, real estate values have plummeted, and the costs of gasoline and food have reached all-time highs.

“It may sound counterintuitive,” said Mike Doshier, a vice president in Fidelity’s retirement services business, “but people seem to have a better understanding of the value and importance of staying the course.”

Fidelity canvassed its roughly 17,000 corporate defined-contribution clients, whose plans cover a combined 11.5 million workers, and found the average pretax contribution for ongoing 401(k) participants was $3,512 in the first six months of the year, compared with $3,283 in the first half of 2007.

There are a number of reasons for the escalation in employee contributions, Doshier pointed out. For one, as corporations have moved away from defined-benefit pension plans and instead steered workers into 401(k)s, they have sweetened their matching contribution, which provides a greater incentive for workers to increase their individual contributions. At the same time, companies have begun automatically enrolling workers in 401(k) plans, while also automatically escalating and automatically investing workers’ contributions.

Finally, Doshier noted that older workers make up a larger portion of the 401(k) participant population, and as they inch toward retirement, many are now making catch-up contributions to shore up their savings. For 2008, 401(k) participants may contribute up to $15,500 to their 401(k) plans, but those who are 50 and older may contribute an additional $5,000.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com

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