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With both 401k and Education saving Plans, all growth is tax-deferred. 

Proceeds from a Education Plan used to pay educational expenses are exempt from federal taxes. But 401k contributions are made in pre-tax dollars while Education Plans have to be funded with after-tax dollars.

Most parents will be in a better position to help their kids with college costs by maximizing their 401k and then taking a early withdrawal for their 401k plan to pay for Education expenses.

Study Finds Few Workers Trade Within Their 401(k) Plans

By: BestWire Services via NewsEdge Corporation
A new study of 1.2 million American workers with 401(k) plans has found that very few people pay attention to their portfolios: Only about one in five bother to engage in any trading at all.

The study, presented before the American Risk Insurance Association by Wharton School pension researcher Takeshi Yamaguchi, found that, when looking at that large pool of 401(k) plan participants over a 24-month period spanning 2003 and 2004, that 80% of them undertook no trading whatsoever.

"Most plan participants are characterized by a profound inertia," Yamaguchi said.

During that two-year period, 10.9% made only a single trade, 7.4% made between two and five trades, and only 2.2% made more than six trades in a year.

Other studies have looked at employee savings within defined-contribution plans such as 401(k)s, but virtually no attention has been paid to how workers handle their assets within those plans.

About 60 million U.S. workers use such plans, which life insurers offer widely. According to the Vanguard investment company, which provided the data to the Wharton School for the research, U.S. workers have about $2.5 trillion in their defined-contribution pension accounts, and there are now about three times as many employees in defined-contribution plans as in defined-benefit plans.

Yamaguchi said 401(k) plan participants were far more likely to trade actively if they were affluent older men with higher incomes and longer job tenure. According to the study, those traders were likely to use the Internet to access their 401(k) accounts and have a higher number of investment options in their plans, and they were more likely to hold active equity funds rather than index or life-cycle funds. Plans that offer employee-stock features also made it more likely that a plan participant would be an active trader.

Overall, however, Yamaguchi said, "only a few engage in any trading at all, and only a tiny minority trades actively." Even the most active traders among the 1.2 million workers surveyed had portfolio turnover rates about one-third the rate of professional money managers. Only 445 workers -- or 0.04% -- of those 1.2 million workers made more than 50 trades a year, according to the study data.

By Chris Grier, Washington correspondent, BestWeek: