Report: 401(k)s fail to provide retirement security

A report from the Center for Retirement Security Research at Boston College finds that the median 401(k)/IRA balance for households approaching retirement is $120,000, well below what is needed when combined with Social Security benefits to ensure a secure retirement for workers who no longer have traditional pension plans.

The situation for younger workers is more dire. Their 401(k)/IRA median balance is between $5,000 and $9,000 lower than it was in 2007.

Since only 19 percent of American workers are enrolled in a traditional, or defined benefits, pension plan, the 401(k)/IRA savings plans are the only supplement to the Social Security  that most workers will receive when they retire, making retirement look bleaker for most Americans.

“Almost daily, we hear stories of the crisis stemming from the breakdown of the three-legged stool of retirement: traditional pensions, Social Security, and individual savings,” writes Yvonne Walker, president of SEIU Local 1000 in California. “For the majority of Americans, one of the legs of the stool is already gone — traditional pensions. With its replacement, the 401(k), the stool is in danger of tipping retirees into poverty.”

“The 401(k) experiment has been a disaster, a disaster which threatens to doom millions to economic misery during the later years of their lives,” writes Duncan Black, who blogs under the name Atrios at Eschaton, in an op ed piece for USA Today.

According to the Boston College report, some of the key assumptions that played an important role in rationalizing the switch from traditional pensions to 401(k) plans have proven to be incorrect. For example, it was assumed that workers would enroll in 401(k) plans if traditional pensions were not available and that most would contribute the maximum 6 percent of annual salary to the plan with employers contributing another 3 percent.

If these assumptions had held true, 401(k) participants whose average salary at retirement is $65,000 could expect to have a 401(k)/IRA balance of $363,000 as retirement approaches.

But the Boston College report finds that non-participation rates for young and low-income workers is high. Of workers aged 20-29 whose income is $20,000 a year or less, 80 percent are not enrolled in a 401(k) plan. For the same age cohort who make between $20,000 and $60,000 a year, 40 percent are not enrolled in a 401(k) plan, and for those making more than $60,000 a year, 31 percent are not enrolled.

Another assumption was that stock prices and 401(k) balances would steadily increase with only minor downturns that were quickly corrected.

But the crash of 2008 and the resulting economic malaise shattered this assumption. According to Walker, 401(k)s lost 47 percent of their value between 2007 and 2008, or a total of $2.8 trillion.

Even as the economy slowly returned to life, the median 401(k) balance has remained stagnant or in many cases, is much less than it was before the crash in 2007.

In 2007, the median balance for those about to retire was $118,000; by 2010, it had only increased to $120,000.

The median balance for younger cohorts has gotten worse. For workers aged 45-54, the median balance dropped from $75,000 in 2007 to $70,000 in 2010; for those age 35-44 it dropped from $44,000 to $35,000.

The high unemployment rate and general economic weakness that followed the great crash also caused many 401(k) participants to cash out their plans or make hardship withdrawals to tide them over until they find a job or they get through whatever other economic hardship they are facing.

Cashing out and making hardship withdrawals makes it much harder to accumulate the individual wealth needed to make a 401(k) retirement secure.

Unless something is done to address the failure of 401(k) plans, rates of the elderly living in poverty will increase significantly putting an even greater burden on a social safety net that is already threadbare.

Black advocates an immediate increase to Social Security benefits. “We need an across the board increase in Social Security retirement benefits of 20% or more,” he writes.

Senator Tom Harkin has proposed a different approach. He has filed legislation that would allow private sector workers to enroll in a pension fund supported by the US government. Harkin calls the proposed pension fund Universal, Secure, and Adaptable (USA) Retirement Funds.

Harkin explains how they would work:

Employers participating in a USA Retirement Fund would automatically enroll their employees.  In other words, all employees would participate unless they specifically opted out.  Employer and employee contributions would go into the fund and would be managed by a board of trustees.  When a participant retires, the fund would provide the retiree with a monthly benefit – like an annuity – for as long as he or she lives.

“Hardworking Americans want to enjoy their golden years with dignity and financial independence,” said Harkin.  “But that is getting less and less likely for the average person. We can do better.  We must do better.”

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