© 2024 Pension Rights Center. This work is licensed under a Creative Commons Attribution-Non Commercial 2.5 Generic License.
By David Brandolph
A recent study from Vanguard found that the employees participating in the 401k plans that the large financial institution serves as recordkeeper increased their contributions to record levels in 2023, and automatic plan enrollment is boosting participation for younger and lower income workers.
According to Vanguard, from 2014 to 2023, contribution rates for the plans they manage increased from 6.8% to 7.4%. In addition, Vanguard found that 82% of eligible employees participated in these plans, rising to 94% when plans used automatic enrollment, showing that only a small percentage of auto-enrolled workers elected to opt-out of coverage once placed in the plan.
It’s good news that Vanguard plan members have increased their contributions and that their plans have expanded coverage. Unfortunately, the Vanguard study doesn’t reflect the reality that the U.S. retirement system isn’t working for most Americans. Instead, many who are approaching their post-career years are finding that retirement financial security is becoming an elusive pipedream.
Even while touting its positive plan participation news, Vanguard acknowledges that more than one-half of U.S. private-sector workers still have no access to any employer-sponsored pension or defined contribution plan, such as a 401k. And, even for those with access to such a plan, the picture isn’t rosy for most. In fact, the Federal Reserve Board found that, in 2022, the median plan account balance for families approaching retirement (age 55 to 64) was a mere $185,000*. That amount is woefully inadequate for a retirement that may require income for 30 years or more.
Furthermore, Internal Revenue Code tax-deferral benefits provided to those fortunate enough to have 401(k)s and IRAs (individual retirement accounts) largely benefit upper-income taxpayers. A study by the Center for Retirement Research at Boston College found that 59% of the approximately $185 billion to $189 billion annual tax benefit (measured in 2020) went to the top 20% of earners, compared with just 3.7% for the bottom 40%.
In a recent New York Times article, reporter Mark Miller found that the U.S. retirement system has accumulated a “staggering $25.4 trillion in IRAs and 401ks” that are overwhelmingly held by higher income households, and that has “large gaps in retirement account ownership and participation by race, gender and ethnicity.”
As most employers are now adopting do-it-yourself 401(k)-type plans so that investment responsibility is placed on each individual employee, these plans are likely here to stay. But continuing with the status quo isn’t a viable solution. Despite reports from Vanguard and others of incremental employee gains, these plans aren’t sufficiently moving the needle towards achieving a financially secure retirement for working families across the nation.
To achieve broad-based retirement income security, PRC will continue to work for innovative and equitable solutions, such as Congress redirecting some of the billions of dollars in tax breaks for retirement savings that disproportionately benefit upper-income households towards improving retirement income security for the more financially vulnerable.
The evidence indicting the current system’s failure is compelling — it’s time for Congress to act.
*From the “Household Financial Component” pull-down menu, select “Retirement accounts,” from the “Distributed By” pull-down menu, select “Age of reference person.”
