The Failure of the 401(k): How Individual Retirement Plans are a Costly Gamble for American Workers

The Failure of the 401(k): How Individual Retirement Plans are a Costly Gamble for American Workers

November 9, 2010
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The retirement security of American families has crumbled in the past generation. Workers retiring in the next 20 years can expect to receive only 65 percent during retirement of what they made during their working years, a drop of 16 percent from their parents. Foreboding economic forecasts suggest that young workers today could be on even shakier ground. 
 
Much of the decline in retirement security is due to the shift in the private sector from providing retirement benefits through traditional pensions, which guaranteed a lifetime stream of income at retirement, to less secure individual retirement accounts, whose benefits vary with the size of employer and employee contributions, and the volatile swings of the stock market. This report provides a picture of the current state of the US' private retirement system, breaks down why this picture bodes ill for the future of retirement in the country, and discusses why that system needs reform.
 
  • Employer-based retirement coverage is woefully inadequate. Only 59% full-time workers have access to a retirement plan at work, and already economically disadvantaged subsections of the population—minorities, young people, and low-income workers—have the lowest access rates. Among full-time employees, just 38.0 percent of Latinos, 54.4 percent of workers aged 25-43, and 38.4 percent of workers in the lowest income quintile have access to a retirement plan. 
  • Even for those who have coverage, the most common type of retirement plan, the 401k, is fatally flawed. The significant possibility of outliving retirement savings or losing them to a turbulent market, high fees, or poor investment decisions make 401(k)s and other individual retirement plans unfit to be the primary private supplement to Social Security. 
  • The high fees that 401k-type plans charge are one of the worst aspects of these plans. Every investment option in a 401k charges hidden and high fees for investment management and other services. These fees might seem small, but the report calculates that they can cost an average worker more than $70,000 over a lifetime of saving. 
  • The 401k needs to be replaced, not reformed.  The report examines several proposals for replacing the private retirement system. Though all these proposals contain elements that would improve access to benefits, only one, Guaranteed Retirement Accounts, would provide a secure foundation for the dignified retirement that should be the right of all American workers.