Workers Sticking by 401(k) Plans, Study Says

Even though employers continue to take away matches, employees are keeping their money in defined contribution plans.

Employees aren’t giving up on 401(k) plans even as the long-term viability of this method of retirement savings has come into question during the financial crisis. Chalk it up to an increase of automatic enrollments, workers’ uncertainty about other savings options, or just plain laziness.

After all, many employers have pulled or lowered their 401(k) matches, giving employees less incentive to stay in the plans. However, Charles Schwab found that among the companies whose plans it manages, 77% of eligible employees participated last year, up from73% in 2007, according to analysis released yesterday. The firm said the uptick was largely due to companies increasingly enrolling new employees automatically.

Moreover, according to Charles Schwab, employees are not fiddling around with how they disburse their money in their 401(k) plans. Changes in asset allocations were not significant, the firm said. Charles Schwab has also noted that nearly half of the assets held by 401(k) participants who left their jobs during the first quarter of 2008 still haven’t been claimed, by either taking a cash distribution or moving them to another retirement plan.

Vanguard has similarly found that employees aren’t touching their nest eggs. Only 6% made changes to their portfolios during the first quarter even though the majority of balances fell. The investment management firm, which has 3 million participants in its defined contribution plans, concluded in a recent report: “In response to exceptional market circumstances, most participants chose the path of least resistance and did not take any action.”

What has changed significantly is the number of companies willing — or able — to offer their workers matching funds. Charles Schwab says 70% of their corporate clients were making the matches as of March 31, compared to 78% that were doing so in 2007. And the decline may continue, particularly for smaller firms: Nearly half of 400 small businesses told Nationwide Financial Services they will likely have to reduce or stop their matching employee contributions.

Employees have cut back somewhat the amount they put into their plans. On average, workers contributed $1,700 of their pretax income into their employer-sponsored savings accounts during the first quarter, according to Fidelity’s review of its 17,500 corporate defined contribution plans. This reflected a decrease of 8.6% compared to the same time last year, but still 20% higher than the contributions made in 2002.

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