Why 401 (k) Plans Won’t Solve the US Retirement Crisis

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

She has multiple jobs at once to make a living, and none of them offer her retirement options. She puts what she can into an individual retirement account, but those savings aren’t always consistent. That’s because of her work, which was especially hit hard when live shows were canceled due to the public health crisis.

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

The 401 (k) is designed today as the primary way for Americans to save for retirement, especially as traditional pensions are becoming less common. However, a large proportion of workers, particularly low-income people, women and people of color, are lagging behind due to lack of access to the plans.

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Overall, about half of private sector workers are not covered by an employer-sponsored retirement plan, either because their company doesn’t have one or because they don’t qualify for the plan on offer, the Center for Retirement Research said in Boston. College. Additionally, a growing number of U.S. workers generally do not have access to a 401 (k) because they are contractors or self-employed.

Those who don’t have access to an employer-sponsored plan can fall behind without benefits like matching employer contributions or employee auto-enrollment. As a result, 1 in 4 American workers have not even saved $ 10,000 for retirement.

“For many demographics, the typical working-age household has no savings in the retirement account at all or only an insignificant amount,” said Monique Morrissey, an economist at the left-wing Economic Policy Institute.

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

“I don’t mean to say, ‘Get rid of 401 (k) plans,'” said Steve Vernon, an advisory researcher at the Stanford Center of Longevity. “I’m just saying they need to be improved.”

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

Indeed, when people get 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 contributed to their plan

This is who the plans are currently leaving behind. (Many people fall into multiple categories.)

Large companies are much more likely than small companies to offer their employees a 401 (k) plan, 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 companies with fewer than 99 employees did, according to a Transamerica Center survey.

“Employers who don’t offer plans are generally new, small, have relatively few employees, and / or employ temporary, temporary, part-time and / or lower wages,” Angie Chen, deputy director of savings research at the Center for Retirement Research at Boston College, wrote in an email.

Many of these employees do not have time to advocate for change.

“These workers often have urgent financial needs that typically crowd out the demand for employer-provided retirement security,” Chen said.

People with a higher income are much more likely to be offered a 401 (k) at work than those with a lower income, which only increases inequality in retirement savings.

More than 70% of workers with a family income of more than $ 100,000 have access to a 401 (k), compared to 50% of those with a family income of less than $ 50,000, Transamerica found.

“Inequalities in income and access to retirement benefits suggest that lower-income workers will inevitably rely on Social Security for a greater portion of their retirement income,” Collinson said. (The average Social Security check is less than $ 1,400.)

“They are at greater risk of poverty when they retire.”

401 (k) plans are usually associated with a traditional full-time job.

Yet research has shown that the proportion of US workers in temporary or precarious work is rapidly increasing.

Many of these employees who earn their living from apps or work solely for companies on a freelance basis do not have access to an occupational retirement plan. In fact, only 41% of part-time workers were offered a 401 (k) plan by their employer, the Transamerica survey found.

While it is possible to set up and contribute to what is called a solo 401 (k), without a nudge to join or automatically enroll in employer positions, many gig workers see it 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 bailed out in a company-sponsored retirement plan, thinking he’s stashing everything he can in a few different IRAs.

In his industry, he said, most people have no savings for their later years.

“There are many people who are not preparing for retirement,” said 28-year-old Samet.

According to John Scott, project director of retirement savings at Pew Charitable Trusts, 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.

They also generally earn less than white men, which usually means they can save less over time.

According to the EPI, half of working-age white households have access to a 401 (k) or similar plan for their current job, compared to 37% of black households and 26% of Spanish households.

Jenny Lezan of Naperville, Illinois, is not eligible for a retirement plan at the school where she teaches because she is an adjunct professor.

“I’m considered an indentured servant,” said Lezan, 35. “I don’t have any pension funds from now on, which is pretty scary if I’m honest.”

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