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Busting 5 Myths About 401(k) Plans

By Hal M. Bundrick

NEW YORK (MainStreet) ¿ Employer sponsored 401(k) plans have been taking a beating lately. Not necessarily in performance, but in public perception. Concerns about high fees, investment choices, plan options and employee participation have dominated retirement plan discussions. But are 401(k) plans working? With $7.8 trillion dollars in so-called "defined contribution" (DC) retirement accounts and IRA rollovers, it's an important question to ask.

Let's take a reality check on five prevailing myths about 401(k)s:

Myth #1: 401(k) plans are poor performers

"Those critical of the DC system in the past thought that the system would collapse during a sharp economic downturn," says Bob Benish, executive director of the Plan Sponsor Council of America. "They were wrong. Was the system impacted the same way everything else in the economy was? Sure, but it is recovering and becoming stronger as both companies and participants are refocusing on saving and looking at more holistic approaches to financial wellness."

Myth #2: Most employees don't participate

The PSCA annually surveys employer-sponsored retirement plans across the country and says results show participation rates, deferral rates and company contributions have grown over the last couple of years and are now equal to or higher than they were before the recession. 87.6% of eligible employees have a balance in their 401(k) plan.

Myth #3: Participants don't save enough

Whether or not an individual is saving enough to support their preferred retirement lifestyle is a matter for debate, but on average U.S. 401(k) participants are saving more -- setting aside 6.8% of pay in their company's retirement plan. That's up from 6.4% in 2011, and 6.2% in 2010.

Myth #4: Employers aren't pitching in

In fact, 95.3% of employers made a matching contribution in 2012 when it was provided for in the plan (up from 89.0% in 2010 and 85.2% in 2009). And the PSCA says the average company contribution is now 4.5% of pay -- up from 4.2% in 2011 and 3.7% in 2010.

Myth #5: Sponsors limit important plan features

According to the report, Roth after-tax contributions are now available at more than half of companies. Automatic enrollment is used by nearly half of plans (47.2%), including 61.5% of large plans. And more plans are using a default deferral percentage higher than 3% of pay (35.2%) -- nearly 60% of plans automatically increase the default deferral percentages over time.

The study analyzed 686 plans with 10.3 million participants holding $769 billion in plan assets.

--Written by Hal M. Bundrick for MainStreet