Personal Finance: The return of 401(k)s to workers

After leaving employees to fend for themselves with retirement-savings plans in the 2008 financial crisis, companies are now giving workers extra money to stash away for their futures in 401(k) plans.

Companies have been restoring 401(k) matches abolished amid frantic cost-cutting during the Great Recession.

Matches are considered powerful incentives to get people to save money every payday because they are often worth hundreds or thousands of dollars in extra pay a year per individual.

Investment-services firm Charles Schwab reported recently that those companies offering matches are back to pre-crisis levels.

Schwab studied plans of about 1,000 mid-size and large employers and found that 73 percent were providing matching money. That compares with 67 percent in 2009. In 2008, about 72 percent of companies had been providing matching money.

Besides offering matches to stimulate participation, companies also are adding advice so employees contribute more toward their future and invest correctly.

Engaging the worker. Despite studies that indicate people are worried about their financial futures, "it's a challenge to get people engaged" with 401(k)s, said Steve Anderson, head of Schwab Retirement Plan Services. Personal advice can change that, he said.

Research by Aon Hewitt has shown that about half of workers in their 20s pass up 401(k)s even though that means they miss out on the matching money their employers would give them. And research by Financial Engines has shown that when left to their own devices, only about a third of people with 401(k) plans invest money the way they should based on when they intend to retire.

To help fight inattention and mistakes with investing, Anderson said, about 83 percent of employers in Schwab's study are offering advice, about double the 2005 numbers.

In addition, to ensure that more people participate in 401(k) plans, about 42 percent of companies automatically enroll employees in the plans.

With such an approach, employees are allowed to opt out of the 401(k), but few do. Research suggests that people are carried along by inertia, contributing to 401(k) plans if they are placed into them automatically but skipping the plans if they must initiate enrollment themselves.

Emphasizing the upside. Companies with matching funds can coax workers into 401(k) plans by telling them not to miss out on the extra money.

For example, a 30-year-old making $35,000 could end up with about $400,000 in a 401(k) when it's time to retire if the employer consistently provided a match of 3 percent of salary and the employee contributed 3 percent of his or her own pay. Without the matching money from an employer, the same 30-year-old would reach retirement with only about $200,000.

You can try this with your salary at http://bit.ly/fPGEz4. The example assumes the person would average a 2 percent raise a year, earn 7 percent on average a year on investments and contribute 3 percent of pay for 35 years.

Though matches, automatic enrollment, and advice have stimulated more participation in 401(k) plans, participation and contributions to workplace retirement plans fell in 2008 as the economy weakened, according to research by Barbara Butrica and Karen Smith of the Urban Institute.

At the peak in 2008, 39.9 percent of employees were participating in their plans. But by 2010, participation rates had fallen to 38.4 percent. By 2010, the median contribution of people in their 20s had dropped 12.2 percent, and for people in their 50s the decline was 6.7 percent.

That's not unusual. Butrica and Smith found that in good economic times, people contribute more to 401(k) plans and in recessions they cut back.

Anderson said that when people are getting advice on their 401(k)s, they tend to stick with the investment plan recommended to them prior to a stock market decline.