EBRI Issue Brief

Salary Reduction Plans and Individual Saving for Retirement

Nov 1, 1994 22  pages


  • This Issue Brief explores the issues of salary reduction retirement plan sponsorship, participation, and contributions and how they vary with worker and job-related characteristics. In addition, this Issue Brief examines whether or not participants view their salary reduction plan as their primary employment-based retirement plan and how contributions vary along this dimension. The report also discusses the availability of employer matching contributions and their effect on participation among workers. Finally, it examines the issues of asset allocation and benefit preservation.
  • The percentage of workers with an employer who sponsors a salary reduction plan increased from 26.9 percent in 1988 to 36.8 percent in 1993. Over the same time period, the fraction of participating workers among those where a plan was sponsored rose from 57.0 percent to 64.6 percent.
  • In 1988, less than one-half of all salary reduction participants reported the plan as being their primary plan, while in 1993 almost three-quarters of participants reported the plan as primary. Almost one-half of all salary reduction plan participants in 1993 reported also participating in a defined benefit retirement plan. Sixty percent of those who participated in both reported that they considered the salary reduction plan to be primary.
  • Among workers whose employer sponsored a salary reduction plan in 1993, 51.3 percent reported that their employer provided matching contributions, 18.5 percent reported no match, and 30.2 percent did not know. The participation rate among those reporting an employer match was 77.8 percent, compared with 71.8 percent among those reporting no match. The true difference in these participation rates may be understated by these tabulations. The average contribution rate was 7.1 percent among participants reporting a rate in 1993, compared with 6.6 percent in 1988.
  • Overly conservative investments may weaken retirement income security because of low rates of return relative to inflation. A lack of preservation of lump-sum distributions will also erode retirement savings. Participant education regarding such issues will become increasingly important as the salary reduction plan system continues to grow.