401(k)s - The Magnificent $4.8 Trillion Dollar Failure

Independent thought leadership—it’s not just a lame tagline to us. At the Retirement Learning Center, we believe thought leadership must go beyond simply parroting the common media narrative. That’s why in this and future blog posts, as well as elsewhere, we strive to rise above the inane chatter to explore and challenge the real retirement-related issues and trends facing consumers and the industry in general.

In a previous blog we alluded to what some have called the supposed failure of the 401(k) experiment to provide retirement income security to U.S. workers. Let us now honestly explore the purported shortcomings of the 401(k) plan, and discuss possible enhancements to help the plan better meet the needs of the current workforce.

Have 401(k) plans failed? Hardly! According to the Investment Company Institute (ICI), 401(k) plans hold $4.8T.[1] That amount represents a doubling of 401(k) plan assets in the last 10 years. I contend $4.8T is a magnificent failure, and is a lot of money earmarked to support millions in their retirement. In addition to supporting retirees and their families, 401(k) plan distributions will provide significant tax revenue to the Federal and many state governments.

Let’s take a look at how much money is accumulating in participant accounts. According to EBRI/ICI Participant-Directed Retirement Plan Data Collection Project[2] the average balance by age group is as follows:

Perfect? No, but 401(k) plans seem to be working for the traditional, full-time employee segment. But there is always room for improvement.

Imagine for a moment a counter reality where 401(k) plans did not exist. Assume further that Congress never contemplated any other type of self-contributing, tax-favored retirement savings arrangements [e.g., IRAs, Roth IRAs, 403(b)s, 457s, Savings Incentive Match Plans for Employees (SIMPLEs), etc.]. You get the idea. In this counter reality where would the $4.8T of 401(k) assets be today? I suspect most of the money would not have been saved for retirement. It probably would have been spent on the myriad of earthly consumer delights tugging at our wallets.

401(k) plan participation rates among full-time employees are good. Eighty-two percent of workers are making employee pre-tax contributions to 401(k)-like plans.[3] This is a good start. Can we do better? Certainly; for example, part-time workers were not on Congress’ mind when it enacted the Revenue Act of 1978, which created 401(k) plans. And, if a plan is available, the average percentage of income contributed to 401(k) plans—6.8%[4]−could be higher.

But notice it’s not the plan’s fault. 401(k) plans do not succeed or fail. Claiming 401(k) plans have failed is, frankly, foolish. As my esteemed colleague Nevin Adams succinctly opined, “Blaming the 401(k) for the retirement crisis is like blaming the well for the drought.” 401(k) plans don’t fail – we fail. Success is a choice.

Saving for retirement is a personal choice. Not saving enough or at all for retirement, ultimately, is a reflection of personal priorities. Recently, my spouse and I had dinner with friends of many years. The couple related their newly married daughter and her new husband just got back from a trip to Ireland, are busy decorating a new home and looking to purchase motorcycles. Both work for large corporations with good retirement programs. However, neither is participating in his/her respective company’s 401(k) plan. Plan participation is not a priority for them at this time.

But better retirement outcomes through increased plan participation is in the best interest of our society overall. Several policy changes come to mind that could address the mindset of this young couple and make the 401(k), no to make us, more effect in building retirement readiness.

First, let’s take a page from many state and local governmental plans that mandate employee contributions as a condition of employment. Many governmental plans mandate employees contribute 5 , 6, 8 or even 10% or more of compensation to their plans as a condition of employment. These contributions are irrevocable, and the money remains in the plan until retirement or separation from service.

Perhaps a national mandate requiring all employees (and independent contractors) to contribute a certain percent of compensation to a retirement plan would be a sensible step to improving retirement outcomes. Every time I mention this strategy I get the, “What if they can’t afford it,” objection? My response: They (and ultimately all of us) can’t afford not to have more people save for retirement.

It’s not about affordability; it’s about priorities. When retirement readiness is a priority people save for retirement. Let’s not overthink this. To illustrate the shift of priorities over time, let’s take a look at housing. According the June 2, 2016, edition of the Wall Street Journal, the median square footage of a family home is 61% larger than the median size of a family home 40 years ago, and is 11% larger than a decade ago. The larger home decision is based on priorities.

In addition to contribution mandates, a coordinated public policy initiative focused on savings and retirement readiness is essential. Let’s quit bashing 401(k) plans and push public policy initiatives to change investor behaviors and priorities.

We as a society are effective at changing mores and behaviors through public policy initiatives. A great example is smoking. The effective messaging of smoking’s ills created an all but smoke-free public environment; and we did it rapidly. Those of us over 40 remember when smoking was ubiquitous. Our younger colleagues may find it shocking to discover that people once smoked in airplanes, restaurants, theatres, hotels and cars. Smoking was cool and sexy. Anyone remember when the airline industry began to offer “No Smoking” sections on planes?

Let’s move the retirement readiness needle through the same type of public policy messaging. The campaign’s focus is one of encouraging saving and retirement readiness. It’s doable. It’s not political. Congress tends to listen to those who speak up. You can contact your senators and representatives directly and, to make your voice even louder, join with trade groups like the National Association of Plan Advisors (NAPA). It’s in everyone best interest.

[1] 2017 ICI Fact Book, Figure 7.9

[2] ICI Research Perspective, September 2016, Vol. 22, No. 5

[3] Bureau of Labor Statistics, National Compensation Survey-Benefits, 2016 https://data.bls.gov/cgi-bin/dsrv

[4] Plan Sponsor Council of America, 59^th Annual Survey, 2016