Issue Brief. Salary Reduction Plans and Individual Saving for Retirement EBRI EMPLOYEE BENEFIT RESEARCH INSTITUTE

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1 November 1994 Jan. Feb. Salary Reduction Plans and Individual Saving for Retirement Mar. Apr. May Jun. Jul. Aug. EBRI EMPLOYEE BENEFIT RESEARCH INSTITUTE This Issue Brief explores the issues of salary reduction retirement plan sponsorship, participation, and contributions and how they vary with worker and job-related characteristics. In addition, this Issue Brief examines whether or not participants view their salary reduction plan as their primary employment-based retirement plan and how contributions vary along this dimension. The report also discusses the availability of employer matching contributions and their effect on participation among workers. Finally, it examines the issues of asset allocation and benefit preservation. Sep. Oct. Nov. Dec Issue Brief The percentage of workers with an employer who sponsors a salary reduction plan increased from 26.9 percent in 1988 to 36.8 percent in Over the same time period, the fraction of participating workers among those where a plan was sponsored rose from 57.0 percent to 64.6 percent. In 1988, less than one-half of all salary reduction participants reported the plan as being their primary plan, while in 1993 almost three-quarters of participants reported the plan as primary. Almost one-half of all salary reduction plan participants in 1993 reported also participating in a defined benefit retirement plan. Sixty percent of those who participated in both reported that they considered the salary reduction plan to be primary. Among workers whose employer sponsored a salary reduction plan in 1993, 51.3 percent reported that their employer provided matching contributions, 18.5 percent reported no match, and 30.2 percent did not know. The participation rate among those reporting an employer match was 77.8 percent, compared with 71.8 percent among those reporting no match. The true difference in these participation rates may be understated by these tabulations. The average contribution rate was 7.1 percent among participants reporting a rate in 1993, compared with 6.6 percent in Overly conservative investments may weaken retirement income security because of low rates of return relative to inflation. A lack of preservation of lump-sum distributions will also erode retirement savings. Participant education regarding such issues will become increasingly important as the salary reduction plan system continues to grow. EBRI Issue Brief Number 155 November EBRI November 1994 EBRI Issue Brief 1

2 Table of Contents Text Introduction... 3 Sponsorship & Participation... 4 (Table 1) Male/Female Differentials... 6 Primary Plan Status... 6 (Table 2) Salary Reduction Plan Participants with a Defined Benefit Plan... 8 (Table 3, Table 4) Employer Matches (Table 5) Matching and Participation Participant Contributions (Table 6, Table 7) Asset Allocation (Table 8) Benefit Preservation Conclusion Bibliography Tables Table 1, Salary Reduction Plan Sponsorship and Participation Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and Table 2, Salary Reduction Plan Sponsorship and Participation Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Gender, 1988 and Table 3, Salary Reduction Plan Primary Plan Status Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and Table 4, Salary Reduction Plan Participants Who Also Participate in a Defined Benefit Plan Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and Table 5, Availability of Employer Matching Contributions to Salary Reduction Plan Among Civilian Nonagricultural Wage and Salary Workers, Aged 16 and Over, Whose Employer Sponsors a Salary Reduction Plan, by Selected Demographic Characteristics, 1988 and Table 6, Average Employer Matching Contribution, When Available, Among Civilian Nonagricultural Wage and Salary Workers, Aged 16 and Over, Whose Employer Sponsors a Salary Reduction Plan, by Selected Demographic Characteristics, Table 7, Salary Reduction Plan Participation by Presence of Employer Matching Contribution, Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and Table 8, Participant Contribution Rates to Salary Reduction Plans by Plan Status, Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and November 1994 EBRI Issue Brief

3 Employment-based retirement plans are a Introduction critical component of the U.S. retirement income security system. Social Security, individual saving, and pensions together represent the sources of income security in retirement. However, the lines between employmentbased retirement plans and individual saving have become blurred because individuals can now save a portion of their salary on a tax-preferred basis through employment-based salary reduction plans. Salary reduction plans, which are a type of defined contribution plan, include 401(k) plans, 457 plans, and 403(b) plans. The Revenue Act of 1978 permitted employers to establish 401(k) arrangements, named after the Internal Revenue Code (IRC) section that authorized them. In 1981, the Internal Revenue Service issued the first set of proposed regulations covering such plans. These proposed regulations provided some interpretive guidelines for sec. 401(k) and specifically sanctioned salary reduction plans (Allen et al., 1992). Through 401(k) arrangements, participants may contribute a portion of compensation (otherwise payable in cash) to a tax-qualified employment-based plan. Typically, the contribution is made as a pretax reduction in (or deferral of) salary that is paid into the plan by the employer on behalf of the employee. 1 In many cases, an employer provides a matching contribution that is some portion of the amount contributed by the employee, up to a specified maximum. The employee pays no federal income tax on the contributions or on the investment earnings that accumulate until withdrawal. Some plans also permit employee after-tax contributions; the earnings on these contributions are also not taxed until withdrawal. Public-sector employers can establish similar plans under IRC sec. 457; charitable organizations qualified under IRC sec. 501(c)(3) (for example, a taxexempt hospital, church, school, or similar organization or foundation) and public school systems and public colleges and universities can establish tax-deferred annuity plans under sec. 403(b). The 1983 Social Security Amendments required that a new civil service retirement system be established to cover federal employees hired after December 31, The Federal Employees Retirement System (FERS), which Congress adopted in 1986 and which went into effect in January 1987, combines Social Security, a defined benefit pension, and an optional tax-deferred thrift plan similar to a private-sector 401(k) arrangement. Employees hired before the end of 1983 were given the option of joining the new system or remaining in the old Civil Service Retirement System (CSRS) during a six-month period ending in December The following discussion refers to these arrangements generically as salary reduction plans. A worker s 1 The Tax Reform Act of 1986 placed a $7,000 limit on pretax employee contributions to private-sector 401(k) plans. This limit was indexed to the consumer price index beginning in The 1994 limit is $9, The thrift plan is available to workers covered by either the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS), but different rules apply to the two groups. FERS employees are automatically covered under the thrift plan, and the government contributes the equivalent of 1 percent of pay for each employee whether or not the individual contributes. Employees may make further contributions of up to 10 percent of base salary (up to the same maximum as 401(k) plans). The government will then match, dollar for dollar, the first 3 percent of employee contributions and 50 percent of the next 2 percent, with no match beyond 5 percent. CSRS participants may contribute up to 5 percent of their salaries to the thrift plan but are not entitled to government contributions. November 1994 EBRI Issue Brief 3

4 benefit from such plans consists of employee contributions, any employer matching contributions, forfeitures of nonvested benefits by former participants, plus any investment gains and less any investment losses. 3,4 Salary reduction plans, while providing for many workers who may not otherwise have had an employment-based retirement plan, 5 involve explicit decision making on the part of individuals that will directly impact their retirement income security. These decisions start with whether or not to participate in the plan. If workers do decide to participate, they must then decide how much to contribute to the plan and usually how that money is allocated among the various investment options offered by the plan. They may also have to decide how employer matching contributions are allocated. Decisions do not end there. When plan participants change jobs, they receive lump-sum distributions of their vested account balances and must decide whether to roll the money over and preserve it on a tax-deferred basis or spend it and in the process incur federal income and, if under age 59 1/2, penalty taxes. For purposes of evaluating future retirement income security prospects, it is important to understand the decisions that individuals make. The employee benefit supplement of the April 1993 Current Population Survey (CPS) provides such information and along with previous editions of the supplement provides a picture of developments over time. This Issue Brief presents Employee Benefit Research Institute (EBRI) tabulations of the supplement that explore the issues of salary reduction plan sponsorship, participation, and contributions. In addition to examining these trends and how they vary with worker and job-related characteristics, this Issue Brief examines whether or not participants view their salary reduction plan as their primary employment-based retirement plan and how contributions do or do not vary along this dimension. The report also discusses the availability of employer matching contributions and whether such matches affect participation among workers. Finally, it examines the issues of asset allocation and benefit preservation. Sponsorship & Participation Salary reduction plans continue to grow as an important component of the employment-based retirement income system. The percentage of civilian nonagricultural wage and salary workers with an employer who sponsors a salary reduction plan (the sponsorship rate) increased from 26.9 percent (27.4 million workers) in 1988 to 36.8 percent (38.9 million workers) in 1993 (table 1). 6 Over the same time period, the fraction of all workers participating in such plans (the participation rate) 3 Workers are immediately vested (i.e., entitled to receive nonforfeitable and nonrevocable benefit payments from the plan) in their own contributions and any investment gains on these contributions. Workers are also immediately vested in employer contributions counted for actual deferral percentage (ADP) testing and earnings on these contributions; otherwise, only after having worked for the sponsoring employer for a minimum number of years do they become vested in any employer matching contributions and investment gains on these contributions. 4 For a detailed history and explanation of salary reduction arrangements, see Employee Benefit Research Institute, Fundamentals of Employee Benefit Programs, Fourth edition (Washington, DC: Employee Benefit Research Institute, 1990). 5 For detailed discussions, see Paul Yakoboski and Celia Silverman, Baby Boomers in Retirement: What Are Their Prospects? EBRI Special Report SR-23/Issue Brief no. 151 (Employee Benefit Research Institute, July 1994); and Celia Silverman, Pension Evolution in a Changing Economy, EBRI Special Report SR-17/Issue Brief no. 141 (Employee Benefit Research Institute, September 1993). 6 Workers were asked the following question: Some retirement plans allow workers to make tax-deferred contributions to the plan. For example, you might choose to have your employer put part of your salary into a retirement savings account, and then you don t pay income taxes on this money until you take it out or retire. These plans are called by different names, including 401(k) plans, pretax plans, salary reduction plans, and 403(b) plans. Do you participate in a plan like this? Workers who answered yes were counted as salary reduction plan participants. Workers who answered no were asked if their employer offered them a plan like this. Workers who answered yes to either question were counted as working for an employer that sponsored a salary reduction plan. 4 November 1994 EBRI Issue Brief

5 Table 1 Salary Reduction Plan Sponsorship and Participation Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and 1993 Total Sponsorship Participation Sponsored Workers Rate a Rate b Participation Rate c (thousands) Total 101, , % 36.8% 15.3% 23.8% 57.0% 64.6% Annual Hours ,407 3, ,735 5, ,000 1,499 7,459 8, ,500 1,999 11,374 12, ,000 or more 66,498 68, Tenure Less than 1 year 19,478 19, years 33,888 34, years 17,140 21, years 10,944 11, or more years 15,884 17, Age ,373 6, ,895 26, ,710 31, ,453 23, ,393 13, ,631 2, and over 2,289 2, Firm Size Fewer than 10 13,561 14, ,164 8, ,781 6, ,563 6, ,497 7, or more 51,274 54, d 5,471 d 49.9 d 32.5 d d 5,485 d 47.8 d 30.5 d ,000 or more d 43,753 d 54.3 d 35.3 d 65.0 Annual Earnings, 1993 ($) Less than $5,000 7,595 7, $5,000 $9,999 10,119 10, $10,000 $14,999 12,463 15, $15,000 $19,999 13,658 14, $20,000 $24,999 10,956 12, $25,000 $29,999 9,841 9, $30,000 $49,999 20,993 19, $50,000 or more 7,876 8, Sector Federal government 3,227 3, State and local government 13,824 15, Private 84,692 87, Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. a The fraction of workers whose employer sponsors a salary reduction plan for any of the employees at the worker s place of employment. b The fraction of all workers participating in a salary reduction plan. c The fraction of workers participating in a salary reduction plan among those whose employer sponsors a plan for any of the employees at the worker s place of employment. d Data not available. November 1994 EBRI Issue Brief 5

6 rose from 15.3 percent (15.6 million workers) to 23.8 percent (25.2 million workers). The fraction of participating workers among those where a salary reduction plan was sponsored (the sponsored participation rate) also increased, rising from 57.0 percent to 64.6 percent (table 1). The growth in salary reduction plan sponsorship and participation has occurred across almost all worker and job-related characteristics. 7 The likelihood of salary reduction plan sponsorship and participation increased with annual hours worked, job tenure, firm size, and annual earnings (table 1). In 1993, workers with the federal government were the most likely to have a plan available, 59.7 percent, compared with 42.8 percent for state and local government employees and 34.9 percent for privatesector employees. However, private-sector employees were the most likely to participate when a plan was available, with a sponsored participation rate of 66.7 percent, compared with 64.7 percent of federal employees and 55.1 percent of state and local government employees (table 1). 8 Male/Female Differentials Relative to males, females had lower salary reduction plan sponsorship rates (34.9 percent versus 38.5 percent), participation rates (20.8 percent versus 26.4 percent), and sponsored participation rates (59.7 percent versus 68.6 percent) in the aggregate in 1993 (table 2). However, a different picture emerges when comparisons are made within annual hours, age, and annual earnings categories. Female sponsorship rates were similar to those of males within annual hours of work categories. In fact, sponsorship rates were higher for females working 1,000 1,999 hours annually than for males working the same hours (table 2). Accounting for differences in age, young females (aged 30 and under) had sponsorship rates comparable with young males; however, at older ages, females had consistently lower sponsorship rates. Accounting for differences in annual earnings, females had consistently higher sponsorship rates than males in all except the lowest and highest earnings groups (table 2). Similar findings emerged regarding sponsored participation rates. Females working 500 1,999 hours annually had higher sponsored participation rates, than their male counterparts (table 2). Females in all age groups generally had lower sponsored participation rates than their male counterparts. Females earning $5,000 $19,999 had higher sponsored participation rates than similar males. Those earning $20,000 $29,999 had similar sponsored participation rates, and those earning $30,000 and more had sponsored participation rates that were lower than those of their male counterparts (table 2). Therefore, comparisons of females and males with similar demographics, such as annual hours worked, age, and annual earnings, reveal sponsorship rates and sponsored participation rates that temper conclusions which may be drawn from tabulations of the aggregates by gender that males benefit disproportionately from these plans relative to females. Primary Plan Status Salary reduction plans have also grown as a source of primary retirement 7 For an analysis of the growth in salary reduction plan sponsorship and participation rates, see Paul Yakoboski et al., Employment-Based Retirement Income Benefits: Analysis of the April 1993 Current Population Survey, EBRI Special Report SR-25/Issue Brief no. 153 (Employee Benefit Research Institute, September 1994). 8 For an analysis of how salary reduction plan sponsorship and participation rates vary with worker and job-related characteristics, see Paul Yakoboski et al., Employment-Based Retirement Income Benefits: Analysis of the April 1993 Current Population Survey, EBRI Special Report SR-25/Issue Brief no. 153 (Employee Benefit Research Institute, September 1994). 6 November 1994 EBRI Issue Brief

7 Table 2 Salary Reduction Plan Sponsorship and Participation Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Gender, 1988 and 1993 Total Sponsorship Participation Sponsored Workers Rate a Rate b Participation Rate c Males (thousands) Total 54,764 55, % 38.5% 17.2% 26.4% 61.2% 68.6% Annual Hours ,355 1, ,560 1, ,000 1,499 2,365 2, ,500 1,999 4,044 3, ,000 or more 40,593 40, Age ,202 3, ,345 13, ,324 16, ,226 12, ,931 7, ,475 1, and over 1,263 1, Annual Earnings, 1993 ($) Less than $5,000 2,685 2, $5,000 $9,999 3,281 3, $10,000 $14,999 4,653 5, $15,000 $19,999 6,021 6, $20,000 $24,999 5,648 6, $25,000 $29,999 5,806 5, $30,000 $49,999 15,170 13, $50,000 or more 6,665 6, Females Total 46,979 50, % 34.9% 13.1% 20.8% 51.7% 59.7% Annual Hours ,052 2, ,175 3, ,000 1,499 5,094 5, ,500 1,999 7,329 8, ,000 or more 25,905 27, Age ,172 3, ,551 12, ,386 14, ,227 11, ,462 6, ,155 1, and over 1,027 1, Annual Earnings, 1993 ($) Less than $5,000 4,910 4, $5,000 $9,999 6,838 6, $10,000 $14,999 7,810 9, $15,000 $19,999 7,637 7, $20,000 $24,999 5,308 5, $25,000 $29,999 4,035 4, $30,000 $49,999 5,824 6, $50,000 or more 1,211 1, Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. a The fraction of workers whose employer sponsors a salary reduction plan for any of the employees at the worker s place of employment. b The fraction of all workers participating in a salary reduction plan. c The fraction of workers participating in a salary reduction plan among those whose employer sponsors a plan for any of the employees at the worker s place of employment. November 1994 EBRI Issue Brief 7

8 plan coverage. In 1988, less than one-half (49.1 percent) of all salary reduction participants reported the plan as being their primary plan, while in 1993 almost three-quarters (73.3 percent) of salary reduction plan participants reported the plan as their primary plan (table 3). This change occurred across all worker and job-related characteristics. On one level this is a result of the continued strong growth in salary reduction plan sponsorship and participation, particularly among small employers (Silverman, 1993). On another level it may be the result of changed perceptions of primary plan type. That is, workers with both a defined benefit and a salary reduction plan may consider their salary reduction plan to be their primary plan, whereas in the past they would have considered the defined benefit plan primary (see discussion below). This most likely would be the case among younger workers and also among older workers who expect to remain with their present employer for only a few years. Such a change in perceptions may also correspond with any increases in average account balances that have occurred over time. Among salary reduction participants in 1993, the likelihood of the plan being reported as primary decreased as worker tenure, worker age, firm size, and annual earnings increased (table 3). Also, participants in the private sector were most likely to report their plan as being primary: 75.5 percent in 1993, compared with 68.5 percent for federal workers and 62.9 percent for state and local government employees. Female salary reduction participants were slightly more likely than male participants to report the plan as being their primary employment-based retirement plan (74.8 percent versus 72.3 percent) (table 3). Salary Reduction Plan Participants with a Defined Benefit Plan Almost one-half (49.0 percent) of all salary reduction Almost one-half of all salary reduction plan participants in 1993 reported also participating in a defined benefit retirement plan. This compares with 56.3 percent of salary reduction plan participants in plan participants in 1993 reported also participating in a defined benefit retirement plan. This compares with 56.3 percent of salary reduction plan participants in 1988 (table 4). Among salary reduction plan participants in 1993, the likelihood of also participating in a defined benefit plan increased with firm size. Twenty-five percent of salary reduction participants in firms with fewer than 10 employees reported participation in a defined benefit plan, compared with 40.6 percent of those with firms of employees and 57.5 percent of those with firms of 1,000 or more employees (table 4). This finding is consistent with the hypothesis that much of the growth in 401(k) plans among small employers represents new employment-based retirement plan coverage where otherwise there would have been no plan and, in particular, no defined benefit plan (Silverman, 1993). The likelihood of salary reduction plan participants participating in a defined benefit plan also increased with annual hours, worker tenure, and annual earnings. Thirty-three percent of salary reduction participants working fewer than 500 hours annually reported also participating in a defined benefit plan, compared with 50.2 percent of salary reduction participants working 2,000 or more hours annually (table 4). Twenty-six percent of salary reduction participants with less than one year of tenure reported also participating in a defined benefit plan, compared with 64.5 percent of those with 15 or more years of tenure. Twenty-two percent of salary reduction participants earning less than $5,000 per year reported also participating in a defined benefit plan, compared with 59.8 percent of those earning $50,000 or more (table 4). Defined benefit participation among salary reduction participants also tended to increase with worker age, rising from 34.2 percent among those in their twenties to a peak of 57.3 percent for those aged Such dual participation was also most common 8 November 1994 EBRI Issue Brief

9 Table 3 Salary Reduction Plan Primary Plan Status Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and 1993 Participants Percentage of Salary Reduction Participants Who Report Salary Reduction Plan as Primary Total Male Female Total Male Female Total Male Female Total Male Female (thousands) Total 15,586 9,426 6,160 25,148 14,687 10, % 48.3% 50.4% 73.3% 72.3% 74.8% Annual Hours ,000 1, ,500 1,999 1, ,004 2, , ,000 or more 13,108 8,440 4,668 21,049 13,164 7, Tenure Less than 1 year , years 4,104 2,345 1,758 6,365 3,360 3, years 3,457 1,967 1,490 6,604 3,819 2, years 2,692 1,547 1,144 4,147 2,442 1, or more years 4,471 2,988 1,484 6,664 4,273 2, Age ,425 1,977 1,448 4,450 2,476 1, ,984 3,016 1,968 8,706 5,188 3, ,054 2,408 1,646 7,151 4,239 2, ,510 1, ,778 2,154 1, and over Firm Size Fewer than , ,944 1, or more 11,973 7,160 4,813 18,889 10,945 7, a a a 1, a a a a a a 1, a a a ,000 or more a a a 15,438 9,127 6,311 a a a Annual Earnings 1993 ($) Less than $5, $5,000 $9, $10,000 $14, , , $15,000 $19,999 1, , , $20,000 $24,999 1, ,311 1,537 1, $25,000 $29,999 1, ,025 3,024 1,559 1, $30,000 $49,999 5,830 4,040 1,790 8,210 5,468 2, $50,000 or more 3,219 2, ,820 3, Sector Federal government , State and local government 2,513 1,187 1,326 3,593 1,802 1, Private 12,284 7,700 4,584 20,293 12,142 8, Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. a Data not available. November 1994 EBRI Issue Brief 9

10 Table 4 Salary Reduction Plan Participants Who Also Participate in a Defined Benefit Plan Among Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and 1993 Salary Reduction Percentage with Percentage with Defined Participants Defined Benefit Benefit Plan Reporting Salary (thousands) Plan Reduction Plan as Primary Total 15,586 25, % 49.0% 32.4% 59.6% Annual Hours ,000 1, ,500 1,999 1,513 2, ,000 or more 13,108 21, Tenure Less than 1 year 635 1, years 4,104 6, years 3,457 6, years 2,692 4, or more years 4,471 6, Age ,425 4, ,984 8, ,054 7, ,510 3, and over Firm Size Fewer than , , or more 11,973 18, a 1,780 a 40.6 a a 1,671 a 46.8 a ,000 or more a 15,438 a 57.5 a 58.0 Annual Earnings 1993 ($) Less than $5, $5,000 $9, $10,000 $14, , $15,000 $19,999 1,401 2, $20,000 $24,999 1,694 3, $25,000 $29,999 1,973 3, $30,000 $49,999 5,830 8, $50,000 or more 3,219 4, Gender Male 9,426 14, Female 6,160 10, Sector Federal government 789 1, State and local government 2,513 3, Private 12,284 20, Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. 10 November 1994 EBRI Issue Brief

11 among public-sector employees, at 66.0 percent for federal employees and 64.9 percent for state and local workers, compared with 45.2 percent for private-sector workers (table 4). While salary reduction plans are offered as supplements to defined benefit plans, not vice versa, 59.6 percent of those who participated in both types of plans in 1993 reported that they considered the salary reduction plan to be their primary retirement plan (table 4). This was up from 32.4 percent in Thus, while firms offer salary reduction plans as supplemental plans, many workers view them as primary, and this perspective has grown significantly in recent years. This perception of salary reduction plans as primary would be expected among younger workers who view themselves as less likely to be with an employer long enough to accrue meaningful benefits under a defined benefit plan, which could take as long as 20 years given the differences in the way benefit values accumulate in the two types of plans. 9 The data tend to support this hypothesis, as the fraction of dual participants who report the salary reduction plan as primary tends to decrease as worker age and tenure increase (table 4). Seventy-five percent of such dual participants with less than one year of tenure reported the salary reduction plan as primary, compared with 48.9 percent of those with 15 or more years of tenure. Seventy-two percent of dual participants in their twenties reported the salary reduction plan as primary, compared with 50.0 percent of those aged (table 4). The fraction of dual participants who reported the salary reduction as primary tended to increase and then decrease with annual earnings. The fraction who reported the salary reduction as primary increased from 54.5 percent for those earning less than $5,000 annually to 67.6 percent for those earning $15,000 $19,999 and then fell to 54.9 percent for those earning $50,000 or more. Also, dual participants in the private sector were more likely than their public- sector counterparts to report the salary reduction plan as primary (61.3 percent, versus 57.9 percent for federal employees and 53.6 percent for state and local workers) (table 4). When examining overlapping retirement plan participation, non employment-based vehicles, such as individual retirement accounts (IRAs), should also be considered. Among civilian nonagricultural wage and salary workers not participating in any type of employment-based retirement plan in 1993, 6.3 percent contributed to an IRA in By comparison, the IRA participation rate among those participating in some type of employment-based retirement plan, including salary reduction plans, was actually higher than that of retirement plan nonparticipants, at 9.2 percent. 10 Employer Matches Among workers whose employer sponsored a salary reduction plan in 1993, 51.3 percent reported that their employer provided matching contributions to the plan, 18.5 percent reported that their employer did not provide such contributions, and 30.2 percent did not know if their employer contributed. The comparable figures for 1988 were 64.4 percent, 24.1 percent, and 11.6 percent, respectively (table 5). The data indicate that a sizable fraction, almost 9 According to the Bureau of Labor Statistics, 10.2 percent of workers in 1991 had 20 or more years of tenure with their current employer, 6.9 percent had years, and 11.9 percent had years. 10 For an analysis of overlapping individual retirement account (IRA) and employment-based retirement plan participation, see Paul Yakoboski et al., Employment-Based Retirement Income Benefits: Analysis of the April 1993 Current Population Survey, EBRI Special Report SR-25/Issue Brief no. 153 (Employee Benefit Research Institute, September 1994). November 1994 EBRI Issue Brief 11

12 Table 5 Availability of Employer Matching Contributions to Salary Reduction Plan Among Civilian Nonagricultural Wage and Salary Workers, Aged 16 and Over, Whose Employer Sponsors a Salary Reduction Plan, by Selected Demographic Characteristics, 1988 and 1993 Total Employer No Employer Do Not Know If Covered Contributes Contribution Employer Contributes (thousands) (percentage) Total 27,336 38, % 51.3% 24.1% 18.5% 11.6% 30.2% Annual Hours ,000 1,499 1,031 1, ,500 1,999 2,682 3, ,000 or more 22,264 31, Tenure Less than 1 year 2,503 3, years 8,135 11, years 5,569 9, years 4,037 5, or more years 6,533 8, Age ,121 8, ,895 13, ,332 10, ,595 5, and over Firm Size Fewer than , , ,003 1, ,711 3, or more 21,287 29, a 2,732 a 51.2 a 21.3 a a 2,623 a 51.5 a 21.2 a ,000 or more a 23,762 a 54.3 a 16.6 a 29.1 Annual Earnings 1993 ($) Less than $5, $5,000 $9, , $10,000 $14,999 1,907 3, $15,000 $19,999 3,030 5, $20,000 $24,999 3,309 5, $25,000 $29,999 3,481 4, $30,000 $49,999 9,223 11, $50,000 or more 4,367 5, Sex Male 15,411 21, Female 11,926 17, Industry Federal government 1,872 1, State and local government 4,729 6, Private 20,736 30, Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. a Data not available. 12 November 1994 EBRI Issue Brief

13 one-third, of workers with an employer who sponsors a salary reduction plan did not know the specifics of how their plan operated and what was available to them. This was up from 11.6 percent in 1988, possibly indicating that, as plans grew, education and worker awareness lagged behind. Worker education is now a major focus of plan sponsors and their service providers. The fraction of workers who did not know whether their employer provided a matching contribution to the plan decreased as annual hours, tenure, age, and annual earnings increased. There was no notable pattern of variation with firm size (table 5). Among those responding that their employer did provide a matching contribution, the average reported match rate was 65 percent (i.e., for every $1 the employee contributed, the employer contributed $0.65) (table 6). Among those with a match, 9.5 percent reported it to be 1 percent to 10 percent, 12.5 percent reported it to be 11 percent to 49 percent, 18.8 percent reported it to be 50 percent, 4.2 percent reported it to be 51 percent to 99 percent, 21.3 percent reported it to be 100 percent, and 2.5 percent reported it to be over 100 percent. Thirteen percent reported that the match rate varied with the amount of their contribution, and 18.3 percent did not know the match rate (again raising the issue of education and worker awareness) (table 6). The average reported match rate did not vary in any systematic manner with worker and job-related characteristics. Matching and Participation While workers reporting an employer match available were more likely to participate in the plan than were workers reporting no match, the difference was not as great as might be expected. The participation rate among those reporting an employer match was 77.8 percent, compared with a rate of 71.8 percent among those reporting no Among those responding that their employer did provide a matching contribution, the average reported match rate was 65 percent (i.e., for every $1 the employee contributed, the employer contributed $0.65). match (table 7). The participation rate among those who did not know if an employer match was available was about one-half of these rates, at 37.8 percent. It is not surprising that the participation rate was low among those who apparently did not know the specifics of their plan. The question remains whether a lack of knowledge regarding the plan led to low participation rates. The true difference in participation rates between those with a match available and those without a match available may be understated by these tabulations to the extent that those who do not know whether a match is available are more likely, in actuality, not to have a match than to have one. Other studies have found evidence that the availability of an employer match has a more sizable effect on participation. For example, a 1993 Hewitt Associates study of 401(k) plans 11 found an average participation rate of 77 percent in plans with an employer match, as opposed to an average of 59 percent in plans with no employer match (Hewitt Associates, 1993). Participant Contributions Among salary reduction plan participants in 1993, 19.7 percent contributed under 5 percent of pay to their plan, 13.2 percent contributed 5 percent of pay, 19.2 percent contributed 6 percent to 9 per- 11 Hewitt Associates conducted a survey of employers with 401(k) plans in March and April of A total of 487 companies participated by providing information on the 401(k) plans. The data in the survey reflect each company s plan covering the largest number of salaried employees. The survey group was comprised of mainly larger employers. The average size of responding companies was 11,198. Only 7 percent had under 1,000 employees, 49 percent had 1,000 4,999 employees, 18 percent had 5,000 9,999 employees, and 26 percent had 10,000 or more employees. November 1994 EBRI Issue Brief 13

14 Table 6 Average Employer Matching Contribution, When Available, Among Civilian Nonagricultural Wage and Salary Workers, Aged 16 and Over, Whose Employer Sponsors a Salary Reduction Plan, by Selected Demographic Characteristics, 1993 Level of Employer Match Number 1% 11% 51% Over Match Don t Average (thousands) 10% 49% 50% 99% 100% 100% varies know match Total 19, % 12.5% 18.8% 4.2% 21.3% 2.5% 12.8% 18.3% 65% Annual Hours a a a ,000 1, ,500 1,999 1, ,000 or more 16, Tenure Less than 1 year 1, years 5, years 5, years 3, or more years 4, Age a 31.4 a , , , , and over Firm Size Fewer than a , , , , ,000 or more 12, Annual Earnings Less than $5, a $5,000 $9, $10,000 $14,999 1, $15,000 $19,999 2, $20,000 $24,999 2, $25,000 $29,999 2, $30,000 $49,999 6, $50,000 or more 3, Gender Male 11, Female 8, Sector Federal government State and local government 1, Private 17, Source: Employee Benefit Research Institute tabulations of the April 1993 Current Population Survey employee benefit supplement. a Too few observations. 14 November 1994 EBRI Issue Brief

15 Table 7 Salary Reduction Plan Participation by Presence of Employer Matching Contribution, Civilian Nonagricultural Wage and Salary Workers Aged 16 and Over, by Selected Demographic Characteristics, 1988 and 1993 Sponsored Participation Rates a employer no match employer no match matches match unknown matches match unknown Total 62.9% 57.1% 24.5% 77.8% 71.8% 37.8% Annual Hours ,000 1, ,500 1, ,000 or more Tenure Less than 1 year years years years or more years Age and over Firm Size Fewer than or more b b b b b b ,000 or more b b b Annual Earnings 1993 ($) Less than $5, $5,000 $9, $10,000 $14, $15,000 $19, $20,000 $24, $25,000 $29, $30,000 $49, $50,000 or more Gender Male Female Sector Federal government State and local government Private Source: Employee Benefit Research Institute tabulations of the May 1988 and April 1993 Current Population Survey employee benefit supplements. a The fraction of workers participating in a salary reduction plan among those whose employer sponsors a plan for any of the employees at the worker s place of employment. b Data not available. November 1994 EBRI Issue Brief 15

16 cent, 10.5 percent contributed 10 percent, 9.7 percent contributed over 10 percent of pay, and 27.8 percent did not know how much they contributed. Among those reporting an amount, the average contribution rate was 7.1 percent. This compares with an average contribution rate of 6.6 percent in 1988 (table 8). Average contributions rates fell and then rose with annual earnings. The average contribution rate for participants earning less than $5,000 was 7.9 percent in The rate fell to 5.8 percent for those earning $15,000 $19,999 and then rose to 7.9 percent for those earning $50,000 or more. The average contribution rate was 7.8 percent among participants in the state and local sector, 7.0 percent among those in the private sector, and 6.4 percent among federal-sector participants (table 8). The legal limit on pretax employee contributions to salary reduction plans ($8,994 in 1993) does not appear to be a binding constraint for most participants. The average dollar contribution was $2,681 in ,13 The average contribution rate was higher among participants without an employer match than among those with a match (7.7 percent versus 6.9 percent) (table 8). This may be explained by the fact that participation rates increase with the presence of a match and because the match may cause some people to contribute less if they conclude that their overall contribution needs are reduced by the match. The majority of participants who did not know whether their employer matched contributions (62.0 percent) also did not know how much they contributed (table 8). The distributions of contribution rates among those who viewed their plan as primary and those who viewed their plan as supplemental were fairly similar. More supplemental participants did not know how much they contributed (34.1 percent versus 25.5 percent.) The average contribution rates were essentially identical at 7.1 percent for those who viewed their plan as primary and 7.2 percent for those who viewed their plan as supplemental. And again, contribution rates tended to be higher among those without an employer match in both groups of participants. Although comprehensive nationwide Asset Allocation data on salary reduction investment vehicles and options are not available, the previously discussed Hewitt Associates survey gives some indication of how 401(k) funds are invested (Hewitt Associates, 1993). According to the Hewitt survey, 4.5 investment options are offered, on average, for employee contributions. Seven percent of plans offered one or two options, 23 percent offered three options, 29 percent offered four options, 19 percent offered five options, and 22 percent offered six or more options. For employer contributions, 3.5 investment options are offered, on average. Twentynine percent of plans offered one option, 20 percent offered two or three options, 20 percent offered four options, 15 percent offered five options, and 16 percent offered six or more options. Examining the options offered, the survey found that equity options (growth and income equity, growth equity, or equity index) were the most common (offered by 89 percent of plans for employee contributions and by 66 percent of plans for employer contributions). Money market funds 12 Among those with incomes of $50,000 or more, the average contribution was $5,276, still under the limit. 13 See Paul Yakoboski et al., Employment-Based Retirement Income Benefits: Analysis of the April 1993 Current Population Survey, EBRI Special Report SR-25/Issue Brief no. 153 (Employee Benefit Research Institute, September 1994). 16 November 1994 EBRI Issue Brief