Give Reforms a Chance
Despite facing significant criticism, the 401(k) system remains a robust and essential component of the American retirement landscape. While its critics bring up some valid points about current shortcomings, these critiques often overlook the system’s strengths and the improvements already in progress or on the way that address those issues.
Just think about all the ways provisions in the SECURE Act of 2019 and SECURE 2.0 in 2022 are attacking holes in defined contribution world.
In-plan guaranteed income solutions are increasingly being offered in 401(k) plans to address the risk of running out of money in retirement. Continued movement toward automatic features in 401(k) plans, such as auto-enrollment and auto-escalation, has significantly increased participation and savings rates. To wit, Fidelity recently reported record-high contribution levels with a 401(k) plan savings rate reaching 14.2%, including employee and company contributions, as of March 31. That’s the closest the combined savings rate has ever been to Fidelity’s long-recommended 15% benchmark, and the recordkeeper gives credit to auto-escalation.
Multiple Employer Plans (MEPs) allow unrelated employers to join a pooled employer plan (PEP), reducing administrative costs and complexity, helping small businesses offer retirement plans more efficiently (and easily).
The Saver’s Match will transform the Saver’s Credit into a government matching contribution for lower- and middle-income earners who contribute to retirement accounts, enhancing the incentive to save. More part-time workers are now eligible to participate in 401(k) plans.
Emergency Savings Accounts allow employers to automatically enroll employees in these accounts within retirement plans, with contributions capped at $2,500, providing a safety net for unforeseen expenses without tapping into retirement savings.
Student loan payment matching permits employers to make matching contributions to 401(k) plans, 403(b) plans, or SIMPLE IRAs based on employees’ student loan repayments, helping employees save for retirement while paying off student loans.
Provisions like these collectively aim to broaden retirement plan access, encourage higher savings rates, and provide greater flexibility and security for retirement planning.
“It’s important not to lose sight of the 401(k) plan’s ability to help workers of all ages, backgrounds, and incomes build retirement nest eggs,” ICI’s Holden and Brady conclude. “As American workers change jobs over their career, DC plans accrue benefits quickly and are inherently good and well-suited to the mobile workforce we see in 2024.”
No one is saying the 401(k) system is perfect, and it’s a big challenge to nudge more Americans into saving for retirement. But with many steps being taken right now to increase access to plans and encourage more people to save, the 401(k) remains the best plan for working Americans to secure their retirement.
EDITOR’S NOTE: This is the cover story of 401(k) Specialist Magazine Issue 2 2024, which can be read in its entirety via the digital edition here.
SEE ALSO:
• Podcast: Defending the 401(k) with ICI’s Sarah Holden
• AARP Endorses ‘Retirement Savings for Americans Act’ Opposed by ARA
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.