401(k) Plans Gaining Favor for Retirement

If the 1980s were the heyday of the IRA, the ‘90s are starting to look like the decade of the 401(k) in the big and growing business of retirement planning.

As Congress created and tinkered with new programs to encourage saving for retirement over the last 10 years, individual retirement accounts, or IRAs, got most of the publicity.

But since IRAs’ tax breaks were curtailed for some higher-income savers by a 1986 tax law, 401(k) programs operating through employers have claimed a bigger share of the spotlight.

When the New York firm of Buck Consultants surveyed several hundred companies in 1984, just 36% of the respondents offered 401(k) plans to their employees. In a similar survey this year, the figure jumped to 91%.

As 401(k)s have spread, increasing numbers of savers have noticed that they offer some attractions that beat IRAs by a wide margin.

For one thing, more than 80% of the employers surveyed by Buck kick in some extra money for each employee contribution, at ratios ranging from 10 cents to $2 for each $1 from the worker’s paycheck.

The employee gets what amounts to a full tax deduction for all his or her own contributions, since they reduce taxable income.

The annual limit on deductible 401(k) contributions, which is adjusted each year for inflation, stands at nearly $8,500 for 1991, compared to the standard $2,000 for an IRA.

It’s not surprising, then, to hear testimonials like this one from Kathryn Ioannides at the College for Financial Planning in Denver: “Contribute the maximum pretax amount to your company’s 401(k) account. It’s the best bargain in retirement savings plans.”

One problem, however, is that savers have less absolute control over their money than they could expect in a self-directed IRA.

“It is clear that 401(k) plans with matching features, investment choices and loan provisions have become a permanent part of the employee benefit world,” said Fred Rumack, Buck Consultants’ director of tax and legal services.