How Millions of Americans Are Saying 'No Thanks' to Free Money

In these tough times, many workers are passing up free money. According to a newly released report from Aon Hewitt, (AON) nearly 30% of 401(k) participants are not contributing enough to get their full employer match.

Aon Hewitt surveyed more than 3 million employees eligible for plans where employers will match workers' contributions to a retirement account. FINRA, an independent regulator for all securities firms doing business in the U.S., analyzed the data. The organization found that many of those who are missing out on the opportunity are young--from 20- to 29-year-old. Others were automatically enrolled into employer-sponsored defined contribution plans and likely aren't aware of matching plans.

"Free money is free money -- it's a good thing" says Gerri Walsh, FINRA vice president for Investor Education. "Putting in a little more will give you a lot more."

Double Your Investment -- Instantly

If you think a corporate match is no big deal, FINRA helps you do the math with this example that should make you think again. Say you're 30, make $40,000 and contribute 3% of your salary -- $1,200 -- to your 401(k). Assume that you continue to make the same salary and contribute the same each year until age 65. After 35 years you will have put $42,000 in your account. However, if you're like many people who get a dollar-for-dollar match up to 3% of your salary and take full advantage of the match, that doubles your money to $84,000. And that's before factoring in profits on your investments, so the gains might even be bigger. Of course, as with any investment, you can lose money too. But you are certainly starting out ahead of the game with those matching funds.

Then there's the matter of taxes. With a traditional 401(k), you hand over pre-tax dollars. In addition, your contributions, any match your employer provides and any earnings in the account are tax-deferred -- you don't owe any income tax until you withdraw from your account, typically after you retire. At that point, you'll probably be in a lower tax bracket, making the pay-up less painful.

It's a shame that so many people with 401(k)s aren't getting the maximum padding for their savings -- but at least they're contributing. In a new survey by Synovate, on behalf of LIMRA, a research, consulting and professional development firm for life insurance and financial services companies, 40% told pollsters they contribute nothing to their employer-sponsored plan.

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A glance at the results of Synovate's survey generates one big question: Where are the women? Overall, more than 20% fewer women contribute to their employer-sponsored plan, and they're more likely than men to contribute less than 3% of their earnings (19% vs. 13%, respectively). They save less, despite their strong likelihood of having lengthier retirements than men.

Long gone are the good old days when most people had a defined-benefit pension, and in the future, there's a significant possibility that Social Security benefits may be quite different. "The responsibility for retirement security falls on individuals more than was the case for earlier generations," laments Matt Drinkwater, associate managing director for LIMRA Retirement Research. "Despite the volume of education on this subject, people still are not saving enough."

What's even more alarming, says Drinkwater, is that even among those on the brink of retirement, in their late 50s or early 60s, there's a sizable proportion who aren't saving. And they are running out of time to do so. "If they aren't saving, many will face a very different living standard in retirement and could become a burden on others."

A Long Pattern of Insufficient Saving

It's likely too, that if you're not contributing to your 401(k), you aren't contributing to any other savings vehicle either: You're likely living paycheck to paycheck. "You will certainly be between a rock and a hard place when it comes time to retire," says Wayne Copelin, founder and president of Copelin Financial Advisors.

Those hunting for the reason for the lack of participation in 401(k)s might expect to find an obvious scapegoat in the poor economy, but surprisingly, that's not the real culprit: These numbers have been consistent for years and years. Investing newbies can feel intimidated, some are having trouble managing their money, and others don't see how they can stretch their budget to save. They all could use some help. And with the new higher contribution limit of $17,000 for 2012, there's no better time than now to begin.

"Employers need to step up and educate their workforce and explain the importance of long-term saving," says Copelin. "Twice a year, on company time, employers should make time to talk 401(k) basics, because that will spur employees to want to act."