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As their 25th anniversary nears, 401(k) plans have emerged as the dominant employer-sponsored retirement savings plan, according to a new study.
Last year, 401(k) plans had 47 million active participants, up from 40 million in 2000 and 28 million in 1995, according to the study released Monday by the Washington-based Investment Company Institute, which represents mutual funds.
But while enrollment in 401(k) plans has been soaring, participation in defined benefit plans has been slipping. In 2005, defined benefit plans had 21 million active participants, down from 22 million in 2000 and 23 million in 1995.
Similarly, employer sponsorship of 401(k) plans has soared, while employers have steadily moved away from defined benefit plans. Last year, employers sponsored 417,000 401(k) plans, up from 348,000 in 2000 and 201,000 in 1995. By contrast, employers offered just 41,000 defined benefit plans last year, down from 49,000 in 2000 and 69,000 in 1995.
More growth for 401(k) plans seems certain as employers add such features as automatic enrollment and beef up matching contributions as they phase out defined benefit plans.
While Congress added Section 401(k) as part of a 1978 tax, employer adoption of 401(k) plans became possible only after the Internal Revenue Service on Nov. 10, 1981, proposed regulations giving the green light to a key feature of the plans: employees' ability to make pretax contributions, through salary reduction.
Copies of "401(k) plans: A 25-year Retrospective" are available at www.ici.org.