The 401(k) has great potential but nonetheless falls short. It’s the surprising finding in a new paper from pension heavyweights Alicia Munnell and Anqi Chen from the Center for Retirement Research at Boston College, and Andrew Biggs from the American Enterprise Institute.
Titled “Why Are 401k/IRA Balances Substantially Below Potential?”, the paper finds the structure of the savings and investment vehicle is largely sound, but the newness of the 401k and a lack of coverage is causing a gap between possible and actual accumulation amounts.
The authors also name leakage and fees as two other possible reasons for the DC discrepancy.
“401k/IRA plans have become the primary mechanism for retirement saving in the private sector,” they write. “These accounts give households the potential to accumulate substantial retirement assets if they contribute regularly, keep the money in the account, and maximize after-fee returns.”
But, in reality, they add, the typical older worker “has less than $100,000 in 401k/IRA assets, instead of the $364,000 he would have had under a system in which workers participated throughout their careers, paid zero fees on account balances, and did not withdraw money prematurely from their accounts. The discrepancy is somewhat less if individuals under 30 and those with defined benefit plans are excluded from the analysis, but it is still significant.”
Policy implications
The authors then name two policy implications of their findings; continuous coverage and access in the workplace to an employer-based plan “for all workers could substantially increase retirement saving,” and stricter rules for early withdrawal to discourage leaks “could also increase 401k/IRA balances at retirement, albeit more modestly.”
The immaturity and relative success of the “401k experiment” in the wake of the defined benefit’s demise has concerned academicians for some time, with one prominent critic, Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, calling defined contribution plans in their current form “an immature, underdeveloped child.”