Defending the 401(k)

While attacks on defined contribution plans have ramped up significantly in the past year, advocates for workplace retirement plans are stepping up to counter their claims

The 401(k) is under attack on multiple fronts, with a range of scholars, economists, politicians and media lobbing criticisms at the private workplace retirement plan market.

It’s not working, they say. It has widened the wealth gap, disproportionately benefiting higher-income workers. There’s not enough access to defined contribution plans. As 401(k)s have replaced defined benefit pension plans, too many Americans have failed at taking responsibility for their own retirement saving.

These criticisms underscore a growing concern that the current 401(k) system, while beneficial in many ways, also contains significant flaws. But while the private workplace retirement plan industry has been working (and lobbying) diligently to address these flaws and close coverage gaps, some critics seem convinced the 401(k) is a failure and needs to go away.

Some (cough, Bernie Sanders) pine for a return to pension plans, which seems unlikely to gain much momentum despite IBM’s well-publicized move late last year to unfreeze its DB plan and UAW’s unmet demands for a return to pensions during last year’s strike negotiations. Corporate America lacks the appetite and there are many other reasons pensions aren’t coming back.

Some say the answer is a new federal program based on the Thrift Savings Plan model, in which savings accounts of eligible (lower-income) workers are supplemented with government matching funds. This proposal is the basis for proposed legislation called the “Retirement Savings for Americans Act,” which has bipartisan support (as well as the approval of AARP). It is strongly opposed by the American Retirement Association.

Some say the 401(k)’s tax incentives disproportionately benefit the wealthy and should be eliminated, with resulting government revenue increases steered toward propping up Social Security’s ailing finances.

This chorus of criticism has reached a crescendo in recent months, and it’s no doubt being heard by some lawmakers in Washington D.C. who may have the wherewithal to act in a way that could curtail the 401(k) system.

“This year and in the years to come, our clients’ income and assets, as well as our industry—which works day and night to serve those clients—will be a target for Washington,” NAPA President Keith Gredys said during the opening general session of the NAPA 401(k) Summit in April. Gredys stressed that NAPA members must work together to fend off challenges facing the 401(k) market.

“The folks in Washington are looking at qualified plan assets as a potential source of funds. Bottom line: the ability for plan advisors to assist our clients will be impacted if we sit and do nothing. Our livelihoods as trusted advisors will be impacted unless we do something,” he added. “Individually we can do only so much. Together, we are a powerful force.”

Indeed, the attacks have put the 401(k) industry on the defensive, forcing many industry advocates and stakeholders like Gredys and the American Retirement Association to speak out to counter what are seen as flaws in the logic or misinterpretations of data of various criticisms and proposals targeting 401(k)s.

Another staunch defender of the 401(k) is the Investment Company Institute, which plays a significant role in shaping the practices and policies affecting the asset management industry.

In an interview with 401(k) Specialist, ICI’s Senior Director, Retirement and Investor Research Sarah Holden and Senior Economic Advisor Peter Brady noted that part of the criticism, somewhat ironically, stems from the success of the system.

“We now see more than $7 trillion in assets in 401(k) plans and more than $24 trillion in all types of self-directed accounts (inclusive of IRAs and other defined contribution plans). That makes for a big target,” Holden and Brady said.

That’s across more than 700,000 plans and 70 million participants, as of September 2023, per ICI data. Rollovers from 401(k) plans to IRAs account for about half of the $12.6 trillion in IRA assets.

There’s also a lot of misplaced nostalgia for pensions, they add. “Many critics of today’s retirement plans overestimate what retirees got from DB plans in the past because they equate retirement plan coverage with retirement plan income. Although many workers were covered by DB plans, the combination of several factors—vesting rules, the timing of benefit accrual, and labor mobility—resulted in many of those workers getting little-to-no income from the plans in retirement,” Holden and Brady said. “The truth is that more retirees get more income today from the combination of DB plans, DC plans, and IRAs than they did in the so-called ‘good old days.’”

Holden and Brady said they don’t think the threats to the DC system should be taken lightly, but the facts and data are on the side of workplace retirement plans.

ICI points out the 401(k) plan is a powerful savings tool, providing millions of Americans access to: employer contributions (90% of 401(k) plan participants are in plans with employer contributions); a lineup of professionally managed and diversified investment options (28 options on average in large 401(k) plans); and cost-effective products available through ‘dollar-cost-averaging’ investing paycheck-by-paycheck.

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