401(k) Participation, But Not Savings, Grows

More people use 401(k)s, but most don’t save very much.

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The shift from traditional pensions to 401(k)s has resulted in more people saving on their own for retirement. But the percentage of pay most 50-somethings are saving has not significantly increased over the past 2 decades, according to a University of Michigan Retirement Research Center analysis of W-2 earnings records.

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Almost a third (31 percent) of workers ages 50 to 55 in 1991 participated in a tax-deferred retirement plan. That percentage jumped to 41 percent of early 50-somethings in 1997, but then fell to 37 percent in 2003 as the earliest baby boomers entered this age range. However, all three groups contributed nearly the same percentage of earnings to their 401(k): 5.5 percent. Annual contributions were typically $1000 or less (25 percent) or between $1,001 and $2,000 (20 percent). Only about 20 percent of participants contributed $6,000 or more annually.

All three age groups increased their median annual contributions throughout their working life from about $1,500 in their early 30s to approximately $3,000 in their late 50s. The amount saved generally fell off sharply after the late 50s. The percentage of salary saved gradually increased from 4 percent among workers in their late 30s to 7 percent among early 60-somethings.

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An uptick in savings among relatively wealthy investors appears to have contributed to most of the growth in 401(k) balances. Between 1984 and 2003 participants with the lowest three quarters of earnings contributed a median of $2,000 or less per year to a retirement account. Over the same period retirement savers in the top earnings quartile increased annual contributions from $2,000 in 1984 to nearly $6,000 in 2003. “These findings suggest that respondents in the highest earnings quartile benefited most from the increased availability of employer provided tax-deferred plans,” write Marjorie Honig and Irena Dushi, the authors of the paper.

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The most striking increase in annual contributions was among Americans within the top 10 percent of all earners. High income retirement savers increased their 401(k) contributions from $2,000 in 1984 to nearly $12,000 in 2003, which was the maximum contribution limit that year.