401(K) Is A Disaster For Most Retirement Savers

The US 401(k) investment plans are a financial disaster for most retirement savers, according to a new study.

Only the wealthiest savers can make the plans work for them, because they are the only workers rich enough to make the contributions required to build a fund to finance their retirement.

For the rest, the 401(k) is merely increasing the gap between the ‘haves’ and ‘have nots’ in the USA, says the report by the Economic Policy Institute, a centre-ground public policy think-tank.

“The plans were not designed as pensions but as a tax benefit for higher paid employees,” said one of the report authors, economist Monique Morrissey.

“When the failure of the plans is lined up with the proposed cuts in social security, many ordinary workers will lose out financially in their retirement – if they can afford to give up work their two planned major sources of income will have diminished.”

Savers lose confidence

The key features highlighted by the report include:

  • 72% of savings in 401(k) accounts came from households in the top 20% of earners in the USA
  • Retirement savers have lost confidence in defined benefit pensions – as the number regularly saving slumped from 52% of workers aged up to 61 years old in 2000 to 45% in 2010
  • Singles, black and Hispanic households not headed by someone with a college degree had no retirement savings
  • The average white household has 600% more retirement savings than a black or Hispanic household
  • Household heads with a college degree have an average 600% more retirement savings than a household headed by someone with a high school degree

The report explains retirement income disparity is explained by the membership models for the different types of retirement saving schemes.

No change expected

Employees were automatically enrolled into defined benefit pensions, while workers had the choice whether to put money into a 401(k) plan.

As a result, said the report, higher paid workers with more disposable income opted for the 401(k) plan, which gave them improved tax breaks and better returns on investment than the defined benefit pensions which were the only real option for lower paid workers, who tend to be black or Hispanic.

“Don’t expect much to change in the near future is the message of the report,” said Morrissey. “Job choices and wages have toned down due to the recession, but they still need to be saving to make up for welfare cuts and the likely loss of benefits.

“However, their retirement savings have gone down in recent years rather than up.”

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