Contributions to 401(k) plans increased in the last year, Principal Financial found in a survey last fall of 1,159 employees and 529 retirees.

Eighteen percent of respondents said they have increased their contributions, up from 13% that said they had done so in the fourth quarter of 2009.

Meanwhile, 45% of workers and 43% of retirees are either very concerned or extremely concerned about the future of Social Security. And 32% of retirees said Social Security is their primary source of income, and 38% said it is their secondary source of income.

When asked how they would manage if Social Security were to fail, 46% of workers said they would remain in the workforce longer, up significantly from 40% in the fourth quarter of 2007. Twenty percent said they would phase into retirement, and 14% said they would lower their standard of living.

"With mounting worries about Social Security, it appears that fewer workers are staking their future on the system and are considering alternatives, which for many means putting more money in a defined contribution plan," says Luke Vandermillen, vice president of retirement and investor services at The Principal, noting that people are saving more money for retirement, rather than dipping into savings, which is an indication that the economy is improving.

In fact, asked about their views on the economy, 40% of workers and 39% of retirees think the economy will improve next year, and 31% are extremely happy with their current financial well-being, up from 19% in the third quarter of last year. And 29% of workers are optimistic about the economy and their ability to rebuild their finances, up from 21% in the last quarter.

"We are seeing some confidence return as Americans are starting to feel better about their finances and the economy, which is resulting in some positive behavior for long-term savings," Vandermillen says. "While the road may still be bumpy, many Americans are taking personal responsibility to improve both their short- and long-term financial well-being."

Employers are clearly more optimistic about the economy, for another 40% that had suspended 401(k) contributions will resume them by mid-2011, doubling the 40% that already have resumed suspended or reduced matches, reports the Profit Sharing/401(k) Council of America.

Since 2008, 14.8% suspended matching contributions. "Companies continue to make their 401(k) plans a top priority," says David Wray, president of the Council. "Those that have suspended their matches are in the process of restoring them, and companies are aggressively restructuring their investment lineups."

Among those companies that suspended matching contributions, 78.1% said their workers have decreased participation in their 401(k) plan - indicating how powerful a motivator company matches are.

Indeed, separate research by The Principal reveals that the formula employers use for their matching contributions in their 401(k) plans serves as a strong cue to workers for how much to contribute.

When employers promise to match 100% up to 2% of an employee's contribution, the employee invests an average of 5.3%. When employers promise 50% up to 4% of pay, employees' average contributions rise slightly to 5.6%. When employers offer a match formula of 25% of up to 8% of pay, the average participant contribution jumps to 7%. In each case, however, the employer is investing no more than 2% of a worker's salary.

Thus, The Principal said, the design of the employer match can be a powerful motivator in boosting the amount of money participants put into their 401(k) account.

"While the employer contribution stays at 2%, the higher target deferral in the match formula is spurring investors to save more," says Barrie Christman, vice president of individual investor services at The Principal. "This is significant because it shows that employers can incent better savings behavior without having to increase their costs."

Christman adds: "This statistic clearly illustrates how powerful the match can be in promoting better savings behavior. Employees don't want to 'leave money on the table.'"

Despite the good news regarding contributions and matches, the average 401(k) participant needs to work until age 73 to be able to afford retirement, according to an analysis of 10,000 accounts by benefits consulting firm Nyhart.

The firm also found that only 19% of employees will be able to retire by the age of 65, and that employees above the age of 55 will need to contribute 45% of the salary to be able to retire by age 65.

"How much an employee contributes far exceeds the importance of which investment funds they choose," says Thomas Totten, senior actuary and lead researcher for the study. "Increasing your contribution by just 2% to 4% of total income, can shave years off the age you retire."

Lee Barney is the editor of Money Management Executive, a SourceMedia publication.

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