On Its 40th Birthday, the 401(k) Shows Its Age

This year marks the 40th anniversary of the 401(k), an innovation that changed the landscape of retirement savings throughout the United States. Barron’s recent cover story summarizes its history and outlines ways to adapt it to our modern workforce.

Until its introduction in the Revenue Act of 1978, most plans offered by employers were defined benefit plans, sometimes referred to as traditional pensions. Employees were automatically enrolled in the plans, employers funded them and managed the investments. Employees received a portion of their average wages throughout retirement.

Under the 401(k) model, employees must decide to participate, contribute a portion of their wages, often with a match from their employer, and decide where and how to invest the funds. When they retire, employees receive what they contributed plus any gains or losses on their investments.

While the 401(k) gave employees greater control over their retirement funds, it also shifted more of the burden and risk to them. They had to sign up, put aside enough money, and pick the right investments so they would have enough money to live on throughout their retirement.

While this has generally been a positive change for those workers whose employers offer them, the biggest drawback is more than half of Americans don’t have access to one. This is especially true for part-time employees, freelancers, those who work in small firms, and millennials.

Analysis conducted by the Bell in 2016 shows 45 percent of Colorado workers in their prime working years have no access to any type of retirement plan at work. Those who work in low-wage jobs, for small firms, in the agriculture and accommodations and food services industries, and who are Latinx are lest likely to have access to a retirement savings plan at work.

Yet research by AARP shows people are 15 times more likely to save for retirement if they have a workplace plan. That is why the Bell Policy Center and other allies have been advocating for Colorado to create a Secure Savings Plan, much like those adopted in five other states to provide workers with a way to save for retirement.

Ted Benna, a former benefits consultant who is generally acknowledged to be the father of the 401(k), offers four recommendations for making them more effective which are generally consistent with the Secure Savings Plan model:

  1. All employers should be required to offer a 401(k) or a payroll deduction Individual Retirement Account.
  2. The plans should have automatic enrollment and automatic escalation of contributions with workers having the ability to opt out.
  3. Participants should not be allowed to withdraw savings from the accounts before retirement.
  4. The amount of money that can be withdrawn at retirement should be capped with most of the assets being distributed though annuities to ensure a steady stream of retirement income.

Ensuring universal access and automatic enrollment are the key elements to improving the 401(k) and making our retirement system work for most Americans.

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