Boosting Coverage Key to Increasing Retirement Readiness, Study Says

Increasing participation in retirement plans is the most important—but not the only—way to improve retirement readiness, says a recently released report.

 

“Why Are 401(k)/IRA Balances Substantially Below Potential,” a Center for Retirement Research at Boston College paper, discusses the reasons for those savings levels and suggests ways to improve the situation. The paper was written by Andrew Biggs, American Enterprise Institute Resident Scholar; Alicia Munnell, Director of the Center for Retirement Research at Boston College Director and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management; and Anqi Chen, Assistant Director for Savings Research at the Center for Retirement Research.

The authors focused on assets from 401(k)s and IRAs because, they say, aside from Social Security they are the most important vehicles for retirement saving. Biggs, Munnell and Chen argue that if workers start contributing to such accounts early in their careers and do so consistently, keep their money there and minimize investment fees, they can accumulate significant amounts; however, that ideal world is not the case for most of them. They write that what is really the case is that most workers’ 401(k) and IRA balances are significantly lower than they could be.

 

Biggs, Munnell and Chen attribute the situation to four factors.

 

1. Immaturity of the 401(k) System. The authors take a long view of 401(k)s, and call their introduction roughly 40 years ago a “relatively recent” phenomenon whose prominence was not immediate with their introduction. They suggest that those who have been in the workforce the longest have been affected by this timeframe and have not had as much time in their careers to save through these plans. They anticipate that younger, and future, workers will accumulate more through the 401(k) system since it will be more “mature.”

 

2. Lack of Universal Coverage. Biggs, Munnell and Chen observe that many workers do not participate in 401(k)s, and for a variety of reasons such as an employer not having a plan, employee ineligibility to participate and employees simply choosing not to participate.

 

3. Leakage of Account Balances. The authors note that there are a number of reasons why plan participants can take money from their accounts, and that while the government has tried to limit them, still “a substantial portion” of 401(k) and IRA funds “leak” from retirement accounts to address other needs and priorities.

 

4. Fees. Biggs, Munnell and Chen note that fees have “declined noticeably” in the last 20 years, but that accounts still show the lingering effects of the higher rates that were in place in the past and which may have limited wealth accumulation then.

 

Biggs, Munnell and Chen argue that increasing coverage is key to improving retirement readiness, and that until coverage is more universal, 401(k)s and IRAs will not realize their potential as retirement savings vehicles.