Why the 401(k) won’t fix the U.S. retirement crisis

Kyla Ernst-Alper, a 38-year-old aerial performer in New York City, has never had a 401(k) retirement plan.

She holds multiple jobs at once to support herself, and none of them offer her any retirement options. She socks away what she can in an individual retirement account, but those savings are not always consistent. That’s due to her line of work, which was especially hard hit when live shows were canceled because of the public health crisis.

“Before the pandemic, people in my community were barely paying their bills,” Ernst-Alper said. “You’re lucky if you’re able to save money.”

The 401(k) is framed today as the main way for Americans to save for retirement, especially as traditional pensions become less common. However, a large share of workers, particularly low-income earners, women and people of color, are left behind by lack of access to the plans.

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Overall, around half of private sector workers aren’t covered by an employer-sponsored retirement plan, either because their company doesn’t have one or because they’re not eligible for the one offered, according to the Center for Retirement Research at Boston College. In addition, a growing number of American workers generally can’t access a 401(k) because they’re contractors or self-employed.

Those who don’t have access to an employer-sponsored plan can fall behind without perks such as employers’ matching contributions or the auto-enrollment of employees. As a result, 1 in 4 American workers don’t have even $10,000 saved for retirement.

“For many demographic groups, the typical working-age household either has no retirement account savings at all or only a trivial amount,” said Monique Morrissey, an economist at the left-leaning Economic Policy Institute.

To be sure, experts say that while 401(k) plans have their problems, they shouldn’t be discontinued. When utilized, they can be powerful savings tools — the average 401(k) holding of an investor in their 20s in 2019 was $10,500, according to Fidelity. Those in their 30s had an average of $38,400 saved, while those in their 40s, 50s, and 60s had averages of $93,400, $160,000 and $182,100, respectively.

“I don’t mean to say, ‘Get rid of 401(k) plans,'” said Steve Vernon, a consulting research scholar at the Stanford Center of Longevity. “I just mean they need to be improved.”

That improvement should take the form of more access, said Nevin Adams, chief content officer at the American Retirement Association.

Indeed, when people are offered the chance to save in a 401(k), they take it. According to a survey by the Plan Sponsor Council of America, nearly 90% of employees who had access to a 401(k) at work in 2019 made contributions to their plan

Here’s who the plans currently leave behind. (Many people fall into multiple categories.)

Large companies are far more likely than small companies to offer a 401(k) plan to their workers, said Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies.

While 92% of companies with 500 or more employees offered a 401(k) or similar plan in 2019, only 57% of businesses with under 99 workers did, according to a Transamerica Center survey.

“Employers that do not offer plans tend to be new, small, have relatively few employees and/or employ a transient, temporary, part-time and/or lower-wage workforce,” Angie Chen, assistant director of savings research at the Center for Retirement Research at Boston College, wrote in an email.

Many of these workers don’t have the time to advocate for change.

“These employees often have pressing financial needs that typically crowd out any demand for employer-provided retirement security,” Chen said.

Higher-income individuals are far more likely to be offered a 401(k) at work than those with lower incomes, which only exacerbates retirement savings inequality.

More than 70% of workers from household incomes over $100,000 have access to a 401(k), compared to 50% of those from household incomes below $50,000, Transamerica found.

“Disparities in income and access to retirement benefits suggest lower-income workers will inevitably rely on Social Security for a larger proportion of their retirement income,” Collinson said. (The average Social Security check is under $1,400.)

“They will face a greater risk of poverty in retirement.”

401(k) plans are mostly associated with full-time traditional employment.

Yet research has found that the share of American workers engaged in temporary or unsteady work is rising rapidly.

Many of these workers who make their living on apps or only work for companies on a freelance basis will not have access to a company retirement plan. Indeed, only 41% of part-time workers were offered a 401(k) plan by their employer, the Transamerica survey found.

Though it is possible to establish and contribute to a so-called solo 401(k), without a nudge to join or auto-enroll features from an employer, many gig workers forgo these options.

Danny Samet, from Cincinnati, has always worked freelance as a tour manager and merchandiser for bands, jumping from one gig to the next. He’s never saved in a company-sponsored retirement plan, thought he puts away what he can in a few different IRAs.

In his industry, he said, most people don’t have any savings for their later years.

“There are lot of people that aren’t setting themselves up for retirement,” Samet, 28, said.

People of color and women are more likely to work in industries or jobs that don’t give them access to an employer-sponsored plan, according to John Scott, project director of retirement savings at Pew Charitable Trusts.

They also generally make less than White men, which usually means they’re able to save less over time.

Half of White working-age households have access to a 401(k) or similar plan at their current job, compared with 37% of Black households and 26% of Hispanic households, according to the EPI.

Jenny Lezan of Naperville, Illinois, doesn’t qualify for a retirement plan at the school where she teaches because she’s an adjunct professor.

“I’m considered a contract worker,” Lezan, 35, said. “I don’t have retirement funds as of now, which is kind of terrifying, if I’m honest.”      

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