401K’s are Failing

A while ago the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the fact that 1/4 of Americans with 401(k)’s have used them to meet current income needs. Among people in their forties, the share rises to 1/3, an astounding figure considering how close this group is to retirement. In the wake of the economic environment and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts.

As the Post delicately puts it,

Many employers have embraced 401(k)’s and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan. In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers.

A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby cutting overall employee compensation and that 401(k) plans don’t take into account the stagnation of real wages.

Moreover, 49% of private sector worker have neither a 401(k) nor a defined benefit pension plan. Therefore, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).

And they aren’t saving. At least, they aren’t saving nearly enough to maintain their standard of living after retirement. As a report from the Senate’s Health, Education, Labor, and Pension (HELP) committee states, there is a $6.6 trillion gap between what people need to maintain their current standard of living and what they’ve actually saved for retirement. There’s a reason I’ve been using the word “crisis”!

Clearly, more households need to increase their retirement contributions, to the extent that they are able to do so. The magnitude of the retirement savings gap is such that most people will have to work longer if they are able to stay employed, or experience a significant decline in their standard of living when they retire. This gigantic hole shows that the current model, based on 401(k)’s rather than true pensions, is not working! In a future post I will discuss ways to fix the crisis.

A single golf clap? Or a long standing ovation?

By clapping more or less, you can signal to us which stories really stand out.