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CCH® PENSION — 11/21/06

401(k) Participation Rates And Asset Allocations Remained Steady In 2005

As of June 2006, 8% of the retirement plans that use the Vanguard Group, Inc., to administer their employees’ elective deferrals included automatic enrollment. Of those plans, 50% used a 3% default rate, while 25% used a 2% rate, and 10% used a 4% rate. The survey found that 43% of these plans also automatically increased the default percentage each year: 42% used a 1% increase, while 1% of the plans implemented a 2% increase. An age-based targeted-maturity fund was the default investment used by 48% of the plans, followed by 31% using a balanced fund and 21% using a money market fund.

The Vanguard Group annually surveys its defined contribution client universe of 2,200 qualified retirement plans, covering more than 2.8 million participants. Approximately 2,000 plans contain employee contribution features found in 401(k) and IRC Sec. 403(b) plans. The participation and deferral rate data is taken from a 750-plan subset of those 2,000 plans.

Participation rates in plans permitting elective deferrals have remained steady over the past six years—74% in 2005, 2004, and 2003; 75% in 2002; and 76% in 2001 and 2000. The survey noted that participation rates are lower in plans with 5,000 or more participants than in plans with fewer than 1,000 participants because large companies tend to have another retirement plan such as a defined benefit plan or an employer-funded defined contribution plan.

Participation rates increased as income, age, and job tenure increased. In 2005, Vanguard found the following rates based on income:

Income....................2005 Participation Rate

Less than $30,000..................43%

$30,000-$49,999....................63%

$50,000-$74,999....................73%

$75,000-$99,999....................83%

$100,000 or more...................91%

Participation by age was 27% of those younger than age 25, 71% of those age 45-54, and 70% of those age 55-64. The participation rate by job tenure was 38% for those with 0-1 years of service, 54% for those with 2-3 years, 66% for those with 4-6 years, 73% for those with 7-9 years, and 77% for those with ten or more years.

In 2005, Vanguard administered more than 200 distinct employer matching formulas. The most common (used by 79% of plans) was a single-tier formula of $0.50 per dollar on the first 6% of pay. A multitier formula of $1.00 on the first 3% of pay plus $0.50 per dollar on the next 2% of pay was used by 12% of the plans. The remaining plans used either a dollar cap or some other formula.

Participants invested a majority of their assets in equities in 2005: 50% in diversified equity funds, 14% in balanced funds, 13% in company stock, 6% in bond funds, and 17% in short-term reserves. These figures remained steady in 2003, 2004, and 2005, after a lower equity allocation in 2002.

As with participation rates, participant account balances were larger as income, age, and job tenure increased. The Vanguard report shows the average and median account balances:

Income...............Average Balance..............Median Balance

Less than $30,000..........$36,101......................$10,163

$30,000-$49,999.............42,979.......................15,844

$50,000-$74,999.............55,520.......................22,846

$75,000-$99,999.............70,240.......................30,899

$100,000 or more...........110,991.......................49,168

The average account balances based on age was $3,646 for those younger than age 25, $45,751 for those age 35-44, and $122,343 for those age 55-64. Using job tenure as a measure, average account balances were $9,440 for those with 0-1 years of service, $32,309 for those with 4-6 years of service, and $121,045 for those with ten or more years of service.

A complete copy of the Vanguard survey, entitled “How America Saves 2006,” can be downloaded from https://institutional.vanguard.com/iip/pdf/CRR_HAS_2006.pdf.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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