A recent study from the Schwartz Center for Economic Policy Analysis at The New School titled “Are U.S. Workers Ready for Retirement?” presents mixed results regarding employer-sponsored retirement plans. While it’s encouraging that 80 percent of employees who are offered a 401(k) choose to participate, the findings also reveal a significant gap in retirement plan participation: almost half of Americans working as recently as 2011 were not offered any retirement account by their employers, highlighting a considerable discrepancy in the availability of employer-sponsored retirement plans across the workforce.
It’s one reason fully 68 percent of the working age population (25-64) in the United States did not participate in an employer-sponsored plan (other reasons being they chose not to participate of they were not working).
Furthermore, the study reports that between 1999 and 2011, the availability of employer-sponsored plans declined from 61 percent to 53 percent. Lastly, the study found that almost 55 percent of households in which the head of the household is near the retirement age of 55 to 64 will have to subsist almost entirely on Social Security income or will not be able to retire at all due to negligible savings.
“Even when workers have access to and participate in a retirement plan at work, the amount saved through employer-sponsored defined contribution retirement plans are inadequate to maintain their standard of living in retirement,” the authors add. “In fact, individuals with a defined contribution plan are only slightly better off than those without a retirement plan from the point of view of being able to maintain their lifestyle in retirement.”
In other words, with the exception of those with access to a defined benefit plan at work, most U.S. workers “will find themselves realizing low income replacement rates despite their best efforts to save for retirement.”
Even if it employer-sponsored retirement plan, the authors note, participation in the plan is not guaranteed. An employer is permitted under the law to exclude employees from participating in their retirement plan if the employee has less than one year of service, works part time or is younger than age 25.
“Moreover, the structural differences between defined benefit and defined contribution plans impact employee participation. And a public-employee DB plan, worker participation is usually mandatory, guaranteeing that each worker has a retirement account.”
In contrast, under a DC plan, workers choose if they want to participate in the retirement plan.
The author’s did some quick math and the results are astounding. Fully 71 percent of the population was working in 2011 and 53 percent of those workers were offered a retirement plan at work. Of the 53 percent of workers whose employers offer the retirement plan in 2011, 85 percent participated in the plan.
“This means only 32 percent of U.S. workers participated in employer sponsored retirement plan it 2011. Put another way, more than two-thirds (68 percent) of the working-age population did not participate in an employer-sponsored retirement plan because they were not sponsored, did not participate or were not working.”
If it all seems a bit depressing, retirement plan advisors should take note; this means that the majority of Americans do not have access to a plan, meaning employers are primed and ready for a discussion of the tax, recruitment and retention benefits 401(k)s can offer. They’re a win-win for both employer and employee, which makes for a powerful selling tool for adoption and participation, all the more so now that Americans are primarily responsible for their own retirement.
See Also:
- More Like 4-0-None (K): Less Than Half of Workers Contribute
- American Interest in Adding Annuities to 401(k)s Still Rising
- 401(k) Balances Hit Record High: Fidelity
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
