Cecily O'Connor
RedwoodAge.com

As contributions increase, mounting personal debt is eating into retirement savings accounts, even for workers who are exempt from federal tax.

A new study found that while one-third of workers at nonprofit organizations stepped up contributions to their savings plans last year, nearly half are shouldering more than $5,000 in debt. And that's excluding their mortgages. 

As part of the Fidelity Investments study, workers at nonprofits were asked to classify themselves in one of three categories - investors, savers or spenders - to shed light on financial behavior of employees who are exempt from federal taxes.

The majority thought of themselves as savers or spenders, 46 percent and 45 percent, respectively. About 9 percent identified themselves as investors, a group that tends to have less personal debt and better financial habits, said John Begley, executive vice president at Fidelity.

Most workers exempt from federal taxes work in higher education, health care, government, foundations, and faith-based organizations. They save for retirement in workplace accounts known as 403(b)s, a cousin to the 401(k) plan.

About 42 percent of workers who consider themselves investors contributed more to their plan in 2007 than in 2006, compared to one in three of the savers and one-quarter of the spenders. Meanwhile, 40 percent of investors and savers have less than $1,000 in debt, compared to 13 percent of the spenders. 

Significant economic concerns may affect spending habits going forward, however. A growing consensus that the US is headed toward recession has already sparked broad selling on the stock market. 

Employer Resources
A lot of people have a tendency to spend what they earn, demonstrated by the fact that the nation's personal savings rate reached historic lows in 2006. However, one study showed that those between 50 and 64 were more likely than other age groups to have an emergency savings fund equal to three months' living expenses, benefiting from efforts to save in their peak earning years. 

Even so, Fidelity concluded workers of all ages might be in a better position to plug the gap between debt and retirement savings if they took advantage of retirement plan resources offered by their employers. About 58 percent of savers and 51 percent of spenders interacted with their defined contribution plan provider, versus 77 percent of investors. 

Spenders and savers also tend to be less confident in their financial preparedness, with 38 percent and 60 percent, respectively, knowing how much they need to save annually to reach their retirement goal. That compared to nearly 80 percent of investors.

Investing in lifecycle funds, which automatically adjust allocations to become less risky as an investor approaches retirement, is one way employees can save for retirement through their workplace savings plan, especially if they are not prone to actively rebalancing their portfolio. However, just a small number of spenders and savers invest in these funds. And only about a quarter of investors use them.