Savings in 401(k) accounts and plans grew in 2019, but there is till room for improvement in savings levels and the scope of retirement plan coverage, say researchers in a recently released study.
In “401(k)/IRA Holdings in 2019: An Update from the SCF,” Alicia H. Munnell and Anqi Chen look at data from the Federal Reserve’s 2019 Survey of Consumer Finances (SCF) on household holdings in these two sources combined. Munnell is a Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management and serves as the director of the Center for Retirement Research at Boston College; Chen is the assistant director of savings research at the Center for Retirement Research at Boston College.
Munnell and Chen write that the SCF “provides a useful update” about retirement balances for the period 2016-2019, “three years of solid economic growth, strong stock market returns, and continued maturation of the 401(k) system.” They have good news and bad news. The good news: a slight increase in participation rates and greater use of target date funds; the bad news: lack of universal coverage, flat total contribution rates, high fees and significant leakages.
Balances
Munnell and Chen say that the SCF shows, for households nearing retirement, that average 401(k)/IRA balances rose from $135,000 in 2016 to $144,000 in 2019. And, they say, if a couple with that amount uses it to buy a joint-and-survivor annuity, they will receive $570 per month. They add that because that amount is not indexed for inflation, its purchasing power will decline. Further, say Munnell and Chen, since typical households have few financial assets other than their 401(k)s, that $570 is likely to be the only source of income. “The 401(k)/IRA balances for the households approaching retirement will produce only a modest supplement to Social Security,” they write.
Munnell and Chen attribute low retirement account balances to a variety of factors to the lack of continuous contributions and the immaturity of the 401(k) system.
Munnell and Chen say that balances in 2020 “may not be dramatically different” from those in 2019, despite the instability associated with the pandemic, as “the market is modestly higher” and most jobs were lost by those who do not participate in retirement plans.
Compounded Effect
Compounding the problems occasioned by widespread low balances are coverage levels. The system, Munnell and Chen write, provides meaningful balances for just the top two income quintiles of households with 401(k)s. And, they add, according to the SCF only about half of households have 401(k)/IRA balances in the first place.
As private-sector defined benefit plans decline, Munnell and Chen say, some households will derive their retirement income only from Social Security. And that is grim as well, they suggest, since they write that Social Security will replace less of workers’ pre-retirement earnings. This, they say, is due to three factors:
1. The full retirement age is moving from 65 to 67; those who still retire at 65 have a sharper reduction in their monthly income from pre-retirement levels than those who retire later.
2. Medicare premiums are rising.
3. More Social Security benefits will be subject to personal income tax since the thresholds above which benefits are taxable are not adjusted for inflation or wage growth.
Addressing the Problem
The problems occasioned by the immaturity of the 401(k) system, Munnell and Chen write, “will resolve itself over time as new workers can be covered for their whole career.” But that is not a complete answer, since coverage stands around 50%. And increasing that coverage takes on added urgency, they suggest, since Social Security’s impact may lessen. “With Social Security replacing a smaller percentage of pre-retirement earnings, employer-sponsored retirement plans are increasingly important,” they write.
Munnell and Chen contend that participants need “an easy and cheap way” to transform their accumulated balances into lifetime income. They argue that 401(k) balances should be used to defer claiming Social Security, and that the result of that would increase monthly benefits. “That should be a big part of the solution,” they say.
The researchers stress the importance of individuals participating in a plan. “Success first requires that they participate,” they write, adding that “extensive literature has demonstrated that automatically enrolling employees sharply increases participation rates.”
Munnell and Chen also argue in favor policymakers mandating universal coverage; however, they do not advocate a purely government-run program. Instead, they argue that employers should either provide a retirement plan or be required to auto-enroll their employees in a program the government initiates, as several states have already done.
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