The stunning growth of defined contribution (DC) plans like 401(k)s as well as IRAs topping $14 trillion dwarfing assets in traditional DB pension plans can mask what the Economic Policy Institute (EPI) portrays as a real retirement crisis overall but especially for minorities and lower income people. The recently released report using data from the census and Federal Reserve is eye opening.
Most people do not have enough assets saved to replace a sufficient income in retirement with an alarming percentage having saved nothing. Higher income workers are 10 times more likely to have a retirement account at work and the gap between Hispanics and white households with a retirement account – 65% v. 26% – is particularly alarming. The overall gap between higher and lower income workers is widening – top 10% income families had 50 times more savings that the median in 1995 which has grown to 55 times in 2013.
The shift from DB to DC plans has exacerbated the racial and ethnic divide. Overall, household participation in retirement plans has declined from a high of 60% in 2001 to just 53% in 2013 which is driving some of the impetus by states to make retirement plans available to smaller companies.
But didn’t we just get good news about account balances doubling for some Millennials in the past two years? Yes, but EPI explains that even though retirement savings have grown faster than income since 1989, taking into account cuts in Social Security and longevity risk, the grow is not enough to adequately replace income. The recession wiped out a lot of the home equity that many people thought would save them in retirement.
Numbers do not always tell the whole story, though. Many households have money in multiple DC plans and IRA which can make things look worse than they really are and the growing use of auto-features is getting more workers engaged in their employer’s retirement plan. But the EPI analysis highlights the fact that people who takes steps to engage and manage their DC plan will do better people who had relied on the government and old DB plans.
As noted author and NY Times columnist Thomas Friedman declared in 2013, “It’s a 401(k) World” explaining that just showing up will not cut it anymore. You need to know and do more for yourself and those that think their companies, the government or their union will save them will be out of luck in this brave new world. Hopefully people and companies will get the message soon.
