Not Ready to Retire
There are many challenges facing American workers today and some of the blame seems to be pointed toward the voluntary 401(k) tax-deferred savings plan. There is clearly a coverage challenge (where all of America’s workers do not have access to a qualified retirement plan) and a Retirement readiness challenge.
Has the 401(k) Plan Let Workers Down?
Since the 1980s the trend has been for employers to eliminate employer sponsored retirement plans which are defined benefit pensions. Pensions promise workers a benefit based upon age, wage and years of service. The funding of these pension plans is the responsibility of the employer. The trend today is for employers to drop or freeze defined benefit plans and to transfer the burden of funding retirement to the employees by offering workers a 401(k) plan. This means that the employees must understand the funding requirements and then make a conscious decision to adequately fund their own retirement benefit.
A recent Bloomberg article titled How the 401(k) is Wreaking Havoc on Retirement refers to a study by co-authors, ChangHwan Kim, a University of Kansas sociology professor and Christopher Tamborini, a U.S. Social Security Administration researcher. The research serves as a source for the Bloomberg article; where education is cited as the nexus for variation in savings rates of 401(k) participants.
Points to Consider When Distributing Blame
- One of the reasons educated participants have greater 401(k) account balances is due to college graduates normally obtaining employment at a higher compensation level and thus they normally have disposable income to fund retirement savings;
- During 1980s, pension plans were offered to twice as many private sector workers as were 401(k) plans. Currently the U.S. Department of Labor, reports that for each employee being covered by a pension plan, there are approximately 3 workers covered by a 401(k) plan; and
- The 401(k) plan was never designed to be the primary retirement plan of the American worker. The 401(k) plan was designed as a supplemental retirement plan, used to augment the retirements workers
Perhaps the 401(k) plan should be viewed as part of the solution instead of “something that is wreaking havoc on retirement.”
