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CCH® PENSION AND BENEFITS — 11/28/06

401(k) plan participants double those in defined benefit plans, ICI reports

The Investment Company Institute (ICI) has released a study showing that, 25 years after its introduction, the 401(k) plan has become the American worker's leading retirement plan. Figures set forth in the study show that the current number of 401(k) plans held by U.S. workers is double that of private-sector defined benefit plans. Specifically, there are 47 million active 401(k) plan participants, compared to 21 million defined benefit plan participants. Furthermore, in 2005, $2.4 trillion in assets was held in 401(k) plans, compared to $1.9 trillion in assets in private-sector defined benefit plans.

According to the ICI, 90% of 401(k) plans offered by employers are the only retirement plan those employers offer. Three hundred fifty thousand employers offered 401(k) plans as their sole retirement plan in 2002, says ICI.

PPA offers improved 401(k) contribution opportunities

The Pension Protection Act of 2006 (PPA; P.L. 109-280) created the possibility of greatly increasing 401(k) participation and retirement income by making permanent the EGTRRA provisions that increased the 401(k) contribution limits and authorized catch-up contributions for workers age 50 or older. The Act also encourages the adoption of automatic enrollment and provides a fiduciary liability shield for default investments in 401(k) plans. ICI states that the median eligible worker in the lowest income group studied could replace 52% of his pre-retirement income if his company implements automatic enrollment with a default contribution of six percent of pay, invested in a lifecycle fund. Prior to reforms by the PPA, that replacement rate stood at 23%, because of the conservative investment policies of employers adopted in response to liability concerns.

Still, ICI points out that in 1982, a worker and employer could make a total combined contribution of $45,475 per year to a 401(k) plan. The combined limit was reduced in 1983 to $30,000, and is currently $44,000 ($45,000 in 2007) - still less than it was in 1982.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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