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STATEMENT: 401(k)s Fail Millions of Retirees

401(k)s Fail Millions of Retirees: Hidden Fees Swallow 20% of Balance, Yield Low Growth, Susceptible to Market Volatility—According to New Report

New York — The ability to retire with economic security is a cornerstone of the American dream, but that great promise could elude millions because of widespread failures of the 401(k) system, according to a new report by Demos.

The Failure of the 401(k): Why Individual Retirement Plans are a Costly Gamble for American Workers, by Demos policy analyst Robert Hiltonsmith, finds that moving from pension systems with fixed returns to risky 401(k), the aspiration to retire after a lifetime of work into a secure, middle-class-lifestyle has become all too elusive, and could be out of reach for millions of Baby Boomers on the cusp of reaching age 65.

"The retirement security of American families has crumbled in the past generation," said Hiltonsmith. "Workers retiring in the next 20 years can expect to make only 65 percent during retirement of what they made during their working years—16 percent less than their parents. And now, millions of American are out of work and not building retirement equity, and in the middle of what seems, on a personal level, like a never-ending recession. Like these families' financial security, 401(k)s have taken a nosedive for far too many. It's time to put retirement security back on the national agenda."

The report underscores several trends among today's workers that forecast a shaky retirement and illuminates key problems with the 401(k) system. Findings include:

  • Only 59 percent of full time workers have access to retirement plans at work, leaving a large part of the workforce to rely solely on Social Security benefits that are inadequate for a comfortable retirement and are under further attack by political opponents. 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.
  • Of the many workers lacking access to a retirement plan at work, already economically disadvantaged groups-minorities, young people, and low-income workers-have the lowest access rates. Among full-time employees, just 38 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.
  • A description of the many risks to which individual retirement plans expose workers. The significant possibility of outliving retirement savings or losing them to a turbulent market, high fees, or poor investment decisions make 401ks and other individual retirement plans unfit to be the private supplement to Social Security.
  • An analysis of the large effect that high fees can have on workers' retirement savings. These hidden and opaque charges for investment management cost an average worker 20 percent of the overall value of their 401(k). Put another way, that's about $70,000 in fees for a 401(k) with a value of $350,000 at retirement, the recommended amount for a median income retiree. That equals about four years of mortgage payments for the average home loan borrower.

"Basically what we've learned is that, even if you do everything by the book—contribute heavily to and don't borrow against your 401(k) over a working lifetime—you're still not guaranteed a secure retirement," said Hiltonsmith. "The massive hidden fees, the twists and turns of the market, and the fact that, let's face it, most of us are not Gordon Gekko and have no clue about the risks associated with the various investment options we tick-off when we sign on to our 401(k). It has turned out to be a failure, and a clear sign that we need to a solid, pension-style plan with steady growth, security and guaranteed returns."

The report examines several proposals for private retirement reform. Though all these proposals contain elements that would improve access to benefits, only one, Guaranteed Retirement Accounts (GRA), would provide a secure foundation for the dignified retirement that should be the right of all American workers.

The GRA was the central focus of a panel event to be held at the Capitol Visitor Center in Washington, DC, on November 10, 2010 at 4:30 pm. Speakers includedDr. Teresa Ghilarducci from the Center for Economic Policy Analysis at The New School, Robert Hiltonsmith from Demos, Monique Morrissey from the Economic Policy Institute, and Karen Friedman from the Pension Rights Center. Click here to read the transcript of the remarks.