Magazine article American Banker

Researchers Sing Praises of 401(k) as Spur to Saving

Magazine article American Banker

Researchers Sing Praises of 401(k) as Spur to Saving

Article excerpt

Policymakers searching for ways to increase private saving need only look to 401(k) plans for a successful model, a new study suggests.

Economists reviewing the boom in that retirement savings vehicle said it had induced millions of Americans to squirrel away billions of additional dollars -- not just transfer existing savings from other types of accounts.

"Our results suggest that 401(k) plans are a significant and increasingly important component of retirement saying in the United States," wrote James M. Poterba, Steven F. Venti, and David A. Wise, all affiliated with the National Bureau of Economic Research.

They predicted that the funds would "play a very important part in the economic security of retirees in coming decades."

The 401(k) is the fastest-growing employee benefit. In 1988 -- latest year for which highly detailed data were available -- 15.7 million workers had them, six times as many as five years earlier.

$50 Billion a Year

According to recent data, more than $50 billion a year is invested in these accounts, which let employees put a portion of their salaries into employer-sponsored plans. Taxes are deferred until the money is withdrawn later in life.

Total 401(k) investments now equal one-fourth to one-third of all personal savings, said Mr. Venti, an economist at Dartmouth College in Hanover, N.H. For many families, 401(k) assets make up more than half of financial wealth.

To better understand the implications of the growing popularity of 401(k) savings, the study compared the financial and demographic characteristics of workers who participate and those who do not.

The finding: Households with 401(k) accounts added wealth faster in the 1980s than similar households with none.

|A Great Deal'

"It's important to remember that the 401(k)s are a great deal," said Mr. Poterba, an economist at the Massachusetts Institute of Technology, outside Boston. …

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