Defined Contribution Plans Attract More Millionaires

Participation in defined contribution plans is up among Millionaires using the employer-sponsored plans as a way to boost retirement savings, according to a fourth quarter study by Millionaire Corner that tracks the changing attitudes and behaviors of wealthy investors.

More than 60 percent of Millionaires – defined as investors with a net worth of $1 million to $5 million not including primary residence – participated in defined contribution plans at the end of 2011. The average account balance was $509,000, though Millionaire investors age 65 and older had an average of $566,000 invested in a defined contribution plan such as a 401(k), 457, or 403(b) plan.

Participation is up from a year ago when 54 percent of Millionaire investors participated in defined contribution plans and held an average balance of $470,080 in the plans. Balances held IRAs, another tax-sheltered retirement savings vehicle, also rose from an average of $506,190 at the end of 2010 to $548,000 at the end of last year.

Retirement accounts now make up 28 percent of the investable assets of Millionaire investors, compared to 22 percent a year ago. Millionaire investors age 65 and older now hold 30 percent of their assets in a 401(k) or other defined contribution plan. This growing use of retirement plans may reflect concerns held by the majority of Americans – even those will millions of dollars to invest – that they have not saved enough money for retirement.

“Surveys conducted by Millionaire Corner over the last three months indicate that retirement concerns have been heightened by the extreme stock market volatility of 2011,” said Catherine McBreen. “A divisive political environment, weak housing market, high unemployment and the modest nature of the economic recovery have also undermined investor confidence.”

Fears about the financial future appear to be translating into increased retirement saving, as well as a concerted and successful effort to pay down consumer debt, according to our wealth studies. A defined contribution plan can boost an investor’s saving power in several way. The employer-sponsored plans are funded by employees, who typically have their contributions deducted from their paychecks, but the plans often include the benefit of an employer match. The match is essentially free money that enables workers to build an even larger retirement fund. What’s more, taxes on investment gains are deferred until funds are withdrawn, typically at retirement age.

With the decline of traditional pension plans, the defined contribution plan has become the chief retirement savings vehicle in American. Advisors recommend investors begin contributing to a defined contribution plan with their first job and continue to participate on a regular monthly basis throughout their work life.