It’s not the message but the messenger. The fact that an overwhelming number of American workers are unprepared for retirement may not exactly qualify as news, but the dream team of industry experts discussing the topic has given it an added sense of urgency.
In Falling Short: The Coming Retirement Crisis and What to Do About It, high-profile pundit Alicia Munnell, director of the Center for Retirement Research at Boston College, and Andrew Eschtruth, her associate director for external relations, team with legendary business consultant and Greenwich Associates founder Charles Ellis for a comprehensive look at the problem.
Specific to 401(k)s, the power trio writes, “With declining replacement rates from Social Security, employer-sponsored retirement plans become much more important. Unfortunately, at any given time, only about half of private-sector workers are participating in any employer-sponsored plan, and this share has remained relatively constant over the past 30 years.”
The lack of universal coverage, they add, means that many American workers will end up with nothing but Social Security.
“For those lucky enough to work for an employer providing a retirement plan, the nature of these plans has changed dramatically from defined benefit plans to 401(k)s,” they write. “This shift means that the employee rather than the employer makes all the decisions and bears all the risks. Not long after the advent of 401(k) plans, it became clear that participants were accumulating only modest balances in these accounts.”
The Pension Protection Act (PPA) encouraged the adoption of “automatic mechanisms,” but the effects now “appear to have played themselves out, and today less than half of plans have auto-enrollment and a much smaller fraction have auto-escalation.”
As a result, “in 2013, the typical working household approaching retirement with a 401(k) had only $111,000 in combined 401(k) and IRA balances, far short of what is typically thought to be needed for a successful retirement. This amount translates into less than $400 per month adjusted for inflation, they conclude, which will not provide a sufficient supplement to Social Security benefits.”