The 401(k) is 40-plus years old. We’ve progressed but we haven’t come close to reducing racial and ethnic disparities—as described in Anne Tergesen and Heather Giller’s February 23rd Wall Street Journal article, U.S. Retirement Crisis Hits Black Americans Hard.
Ever since it was added to the tax code in 1978, the 401(k) has been subject to eligibility, vesting, and non-discrimination rules[i]. However, those rules haven’t significantly reduced racial and ethnic savings disparities. Decades of experience confirm that the most common “tried and true” designs aren’t enough.
Feel like Phil Conners the weatherman in the bowling alley bar scene[ii]? Phil complains about being stuck in Punxsutawney, Pennsylvania reliving Groundhog Day, over and over and over.
“I was in the Virgin Islands once,” he moans. “I met a girl. We ate lobster. Drank piña coladas. At sunset, we made love like sea otters. That was a pretty good day. Why couldn’t I get that day over and over and over?”
You know, some guys would look at this glass and they would say, “That glass is half empty,’” Gus (holding up a half-full beer glass) responds. “Other guys would say, ‘That glass is half full.’ I peg you as a ‘glass is half empty’ kind of guy. Am I right?”
“What would you do if you were stuck in one place, and every day was exactly the same, and nothing that you did mattered?” Phil exclaims.
“That about sums it up for me,” Ralph mumbles in a drunken stupor.
Albert Einstein, Tom Edison, and Winston Churchill might have loved the movie. A quote misattributed to Einstein fits: “Insanity is doing the same thing over and over again and expecting different results.”
It takes a while, but Phil does recognize how repetition may be futile—as he starts to regress with each passing iteration.
“I have not failed. I’ve just found 10,000 ways that won’t work,” Edison might say.
“Success consists of going from failure to failure without loss of enthusiasm,” Churchill might add.
A solution does exist. It has been in place for almost fifteen years. And, yes, it involves repetition—”over, and over, and over” as Phil would say.
Done right, perennial deployment of automatic features has achieved documented success in reducing racial and ethnic disparities in retirement savings/wealth accumulation.
Phil changes his behavior and strategy to incorporate a different form of repetition. Finally, Phil awakens to see light on new-fallen snow—it is February 3rd, tomorrow.
Plan design features adopted 15 years ago
Prior to the 2006 enabling legislation and 2009 regulations[iii], we announced the addition of automatic features using a five-year implementation each April:
- 2007 – Default to 3% anyone not saving at least 3%; all saving 3% but not 6% (maximum employer financial support at 6% of pay) increased 1%,
- 2008 – Same as 2007,
- 2009 (at the height of the Great Recession) – Default to 4% anyone not saving at least 4%, increase 1% for all saving 4% but not 12%.
- 2010 – Default to 5% anyone not saving at least 5%, increase 1% for all saving 5% but not 12%,
- 2011+ – Default to 6% anyone not saving at least 6%, increase 1% for all saving 6% but not 12%.
Outcome through 2013:
- Since 2007 implementation, 95+% of eligibles contribute,
- Starting in 2008, 1/3 continue to contribute but reject the default in favor of another strategy,
- From 2009 to 2010, over 3,000 increased contributions to 12+%; by 2013, over 6,000 (~20% of eligibles) were contributing 12+%, and
- By 2011, 95+% contributed enough to receive the full employer match, up from 59% in 2006.
I wasn’t surprised to see that automatic features reduce many disparities. Consider Vanguard’s How America Saves 2020—even where most plans limit automatic features to new hires, they significantly reduce disparities based on pay, age, gender, and service (tenure)[iv]:
| Participation disparities based on: | Voluntary Enrollment | Automatic Enrollment |
| Salary: Income < $50,000 | ~<45% | ~85% |
| Salary: Income > $150,000 | 91% | 97% |
| Age: < 45 | ~<55% | ~90% |
| Age: 55–64 | 71% | 93% |
| Gender: Female | 64% | 91% |
| Gender: Male | 60% | 92% |
| Tenure: 0 – 1 years | 37% | 86% |
| Tenure: 2 – 3 years | 59% | 93% |
| Tenure: 4 – 6 years | 68% | 95% |
| Tenure: 10+ | 76% | 94% |
How about race, ethnicity?
In 2008 and again in 2011, Ariel Investments and Hewitt Associates (part of Aon in 2011) studied racial and ethnic disparities in retirement savings.[v] My plan only participated in 2008—our data as of December 31, 2007—nine months after we implemented automatic features.
I was very surprised by the racial and ethnic comparisons. Automatic features had significantly reduced our plan’s racial and ethnic disparities—participation, contributions and equity investing. For example, comparing my firm’s results with the entire study showed:
This was 2007, after just one iteration. Our design incorporated a unique repetition strategy. Along with liquidity, perennially-applied automatic features ensured the behavior changes were not only sustained but enhanced, over time.
Your turn. What are you waiting for?
Contact Jack at jacktowarnicky@gmail.com if you have a success story.
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor roles, and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: This information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] Revenue Act of 1978, Pub. L. 95–600, signed into law by President James E. Carter on 11/6/78. 401(k) was added to the tax code to curtail deferrals by highly compensated employees. Based on the addition of these new non-discrimination requirements, the Joint Tax Committee scored the revenue effect from adding both 401(k) and IRC §125 cafeteria plan rules as: “…This provision will have a negligible effect upon budget receipts.” Accessed 2/23/21, Page 84, at: https://www.jct.gov/publications/1979/jcs-7-79/ [ii] Groundhog Day, 2/12/93, Accessed 2/23/21 at: https://en.wikipedia.org/wiki/Groundhog_Day_(film) Groundhog Day bowling alley scene, Accessed 2/23/21 at: https://www.youtube.com/watch?app=desktop&v=DazUImBLEhM [iii] Pension Protection Act of 2006, Pub. L. 109–280, signed by President George W. Bush, 8/17/06. See also: Automatic Contribution Arrangements, Treasury Regulations §§ 1.401(k)-3(j)(1)(i), 1.401(m)-2(a)(6)(ii), 1.401(k)-2, 1.401(k)-3, 1.401(m)-2, 1.401(m)-3), 1.402(c)-2, 1.411(a)-4, 1.414(w)-1, and 54.4979-1, 2/24/09, Accessed 2/23/21 at: https://www.federalregister.gov/documents/2009/02/24/E9-3716/automatic-contribution-arrangements [iv] Vanguard, How America Saves, 2020, Accessed 2/23/21 at: https://institutional.vanguard.com/ngiam/assets/pdf/has/how-america-saves-report-2020.pdf [v] 401(k) Plans In Living Color: A Study of 401(k) Disparities Across Racial and Ethnic Groups, 2009, Accessed 2/23/21 at: https://www.arielinvestments.com/images/stories/PDF/arielhewittstudy_finalweb_7.3.pdf See also: 401(k) Plans in Living Color A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups, The Ariel/Aon Hewitt Study, 2012, Accessed 2/23/21 at: https://www.arielinvestments.com/401k-Study-2012/
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
