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With Good 401(k) Planning, Everybody Wins

401(k)s Provide Benefits Beyond Retirement Savings

In addition to helping employees save for retirement, a solid 401(k) plan can help companies to attract, motivate and retain good workers, enhance a company's corporate reputation and contribute to the long-term financial success of the business, according to a new study by Charles Schwab.

Among the findings, 95% of financial executives consider their company's matching contributions to be an important feature of the plan, but they still see room for improvement in making a better partnership with employees, according to the study, "A Shared Benefit: Employer Views on the Value of 401(k) Plans."

"A successful 401(k) plan is a team effort between employers and employees," said Dean Kohmann, vice president of 401(k) plan services for Charles Schwab.

Financial executives are committing more time and money to 401(k) plans, with 75% saying they are playing a leading or active role in the development of the plans, Kohmann said.

Employers believe that providing employees with access to financial information is more than just the "cost of doing business" and is crucial to their company's financial success, the study said.

"Today, to be competitive in recruiting and retaining employees, you have to offer a strong 401(k) plan," Kohmann said. "Almost 60% of financial experts believe that 401(k) plans contribute to long-term success."

While senior finance executives believe enrollment in 401(k) plans is a shared responsibility between employer and employee, they feel it is incumbent on the employer to educate employees about the benefits of the plan, features, restrictions and costs, the study found. Three quarters of survey respondents said they prefer to handle most of their 401(k) or 403(b) plan decisions themselves, but they also want to get advice when needed.

Employers that provide financial literacy programs have found that many employees have needs beyond their 401(k)s, such as help with budgeting and saving for a home, Kohmann said.

"We found that 70% of participants want help beyond their 401(k) plan," he said. "They view their employer as a trustworthy source."

Employers are in a great position to provide this crucial role of improving financial literacy, he said.

Employees who are "financially fit" tend to be more productive and better long-term employees, while employees who don't have a good handle on their personal finances have higher rates of absenteeism, stress and strain, Kohmann said.

"Defined benefit plans are in decline and 401(k) plans are becoming the primary savings tool for the majority of Americans," he said. "We need to get more people to increase their savings rate and save their way into retirement."

Following Advice

Among Charles Schwab's customers, employees who use advice saw annual returns of 10.2% over a three-year period, compared to returns of 7.8% for those who did not use advice, Kohmann said.

"Employees who attended financial literacy sessions doubled their savings rates," he said. "The ones using advice are outperforming their peers by an average of 2.4%."

Being financially savvy also helps keep investors from panicking during volatile markets such as these and makes them much more likely to stay invested, he said.

A recent study by Fidelity Investments concurred that most investors are staying the course in 2008.

The average pre-tax contribution among Fidelity's 16,723 defined contribution plans increased by 1.4% during the first half of 2008, compared to the same period the previous year, up from $3,142 to $3,187.

"There is no doubt that American workers are feeling the pressure from escalating energy and food prices as well as a slumping real estate market, but the majority are making retirement a priority and staying the course," said Scott David, Fidelity's president of retirement services.

The percentage of workers taking a "hardship withdrawal" or withdrawing funds from their workplace savings account was up slightly to 0.60% in the three months ending June 30, compared to 0.56% for the same period in last year.

"What we're seeing in the first half of this year is similar to what we saw during the last period of market volatility that began in 2001," David said. "During that turbulent market period, workers also continued to fund their workplace accounts, recognizing the importance of saving for retirement even during a down market."

"It is gratifying to see that senior finance executives are placing increasing importance on a strong 401(k) plan and committing more resources than ever to their employees, who are relying more heavily on the workplace for help in getting (and staying) on the right path to saving for retirement," said Jim McCool, executive vice president of Charles Schwab Corporate and Retirement Services.

Approximately 48% of employers in the study said current economic conditions and increased risk of fiduciary or legal liability on their part were the top challenges they face when offering a 401(k) plan.

Some investors, particularly younger workers with low incomes and few savings, may be forced to put retirement planning on the back burner.

"When prices for staples such as food and gas rise, personal credit becomes more difficult to obtain," the Schwab study wrote. "Saving for retirement may well be less of a priority than more immediate demands for a household's dollars."

"Younger, hourly workers are living hand-to-mouth, and no level of education appears to convince them to save for a distant retirement date," said a CFO in the consumer goods industry quoted in the Schwab study.

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