After 40 years, some say 401(k) is due for a facelift
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • KKR lifts out 3 to focus on clean energy infrastructure
      Richard Johnson
      Appian Capital Advisory adds global investor relations head
      Alternative investment funds faced liquidity squeezes in COVID-19 crisis and 2019
      CI Financial launches global real estate, infrastructure joint venture
    • Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
      Deloitte to acquire Sydney-based consulting firm Rice Warner
    • Alternative investment funds faced liquidity squeezes in COVID-19 crisis and 2019
      Jerome Powell, chairman of the Federal Reserve, listens during a Senate Banking Committee hearing in Washington on Dec. 1, 2020
      Fed saw some time before taper conditions met – minutes
      International Monetary Fund and World Bank spring meetings signage at the IMF headquarters in Washington
      IMF upgrades global growth forecast, warns of diverging recoveries
      A cashier standing behind a protective barrier assists a customer at a Peter Harris Clothes store in Latham, N.Y.
      Job growth tops 900,000 in March as hiring broadens
    • Pentegra launches pooled employer plan
      Teresa Hassara
      Ascensus taps MassMutual alum as new FuturePlan president
      Economic Group Pension Services scoops up third-party administrator
      OregonSaves gathers $100 million in assets
    • Shoppers wear protective masks while visiting an Apple Inc. store at George Street in Sydney, Australia, on June 24, 2020.
      Apple backs SEC mandate on climate disclosure
      Emissions rise from the Kentucky Utilities Co. Ghent generating station in Ghent, Ky.
      Investors, businesses call for ambitious emissions goals
      Signage for Temasek Holdings Pte. is displayed during a news conference following the company's annual review in Singapore
      Temasek, BlackRock partner to launch carbon-cutting funds
      New York state pension fund limits oil sands investments
    • Fearless Girl
      SSGA’s Fearless Girl statue now shattering glass ceiling
      Tangen video
      Norges chief dons chef’s hat to boost employees’ spirits
      Ken Griffin
      Ken Griffin donates $5 million to give Miami students internet
      New book culls institutional wisdom from podcast series
    • Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
      A sign outside a Credit Suisse Group bank branch in Murten, Switzerland
      Credit Suisse, Nomura slump as banks tally Archegos damage
    • Orlando pension funds pick Axiom for emerging markets equity
      People enter a Bank of New York Mellon Corp. office building in New York
      BNY Mellon adds China debt as collateral for tri-party purchases
      BayerInvest taps BlackRock to run ESG-focused private debt allocation
      Labor Department answers questions about investment-advice exemption
    • Mirova adds proxy voting and engagement leader
      Erick Bronner
      Palladium Equity Partners picks new head of fundraising and investor relations
      The Euro sculpture illuminated outside the Eurotower, the former headquarters of the European Central Bank in Frankfurt on Dec. 15, 2020
      European manager AUM rises to record $12.7 trillion in 2020
      Lydia Wu
      Barings chooses head of Greater China distribution
    • Kansas City Employees adopts global strategy with small-cap swing
      Michael C. Viteri
      Arizona appoints new CIO
      A £10 sterling bank note with a pound coin and a ballpoint pen, with focus on the word 'pension.'
      U.K. defined benefit plans’ surplus surges in March
      Columbia University professor Takatoshi Ito
      GPIF treads water as ESG picks up pace
    • Mirova adds proxy voting and engagement leader
      Erick Bronner
      Palladium Equity Partners picks new head of fundraising and investor relations
      Callan brings on 2 executives
      Michael C. Viteri
      Arizona appoints new CIO
    • Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
      Vista Equity promotes 2 to leadership roles on 2 funds
      Azimut takes minority stake in HighPost
    • CalSTRS indutrial property
      Investors hungry for industrial properties
      Tim Wang
      GLP names co-president of logistics, industrial real estate for China
      Frank Forster
      StepStone Real Estate adds managing director for Europe
      Christine Iacoucci
      BentallGreenOak promotes from within to fill Canadian CIO role
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
      Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Orlando pension funds pick Axiom for emerging markets equity
      St. Louis Public Schools assigns $5 million to value-added real estate
      BayerInvest taps BlackRock to run ESG-focused private debt allocation
      Insurer Phoenix chooses Barings for real estate debt allocation
    • Orlando pension funds pick Axiom for emerging markets equity
      St. Louis Public Schools assigns $5 million to value-added real estate
      BayerInvest taps BlackRock to run ESG-focused private debt allocation
      Insurer Phoenix chooses Barings for real estate debt allocation
    • Passive Investment Management Services
      Active Extended Global Credit Manager Search
      Actuarial Services
      Investment Management Services
    • Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
      Taiwan Semiconductor’s No. 1 in the emerging markets book
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
      Vaccination cartoon
      Rallying to meet the ongoing COVID-19 challenge
      Tesla cartoon
      Don’t confuse wealth creation with retirement saving
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
      Jared Gross
      Commentary: Anchors and allocations – breaking the grip of 60/40
      Peter Marber
      Commentary: Is it time for an emerging markets rally?
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
      watch video
      0:45
      Private funds weathered 2020 turmoil
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
    • POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
December 10, 2018 12:00 AM

After 40 years, some say 401(k) is due for a facelift

The plan has helped millions, but experts believe tweaks are needed

Margarida Correia
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    M. Scott Mahaskey/Politico
    Ted Benna, the father of the 401(k), said the $10 trillion to $15 trillion saved in the plans helped tens of millions in retirement.

    Of all the major milestones the 401(k) has crossed, its most recent stands out.

    Forty years ago, Congress paved the way for the birth of the nation's first 401(k) retirement savings plan when legislators added paragraph (k) to Section 401 of the Internal Revenue Code.

    Since that day on Nov. 6, 1978, the 401(k) has grown and flourished, settling comfortably into households across America. Yet while many say it has aged well, plenty more say that it's time for a few nips and tucks.

    "It's helped tens of millions of workers save somewhere between $10 trillion to $15 trillion when you count the money that's been transferred out of 401(k)s into IRAs," acknowledged Ted Benna, a benefits consultant who has been called the father of the 401(k).

    Big numbers, indeed. The plans took off almost immediately after The Johnson Cos., the benefits firm co-owned by Mr. Benna, launched its plan in 1981.

    By 1984, there were 17,303 401(k) plans holding $92 billion in assets, according to the Investment Company Institute. Today, 55 million Americans are active participants in some 555,000 401(k) plans, which held $5.3 trillion in assets as of June 30. "They've evolved over 40 years from a supplemental savings plan to the primary employer-sponsored retirement vehicle," said Lori Lucas, Washington-based president and CEO of the Employee Benefits Research Institute.

    Whether that's reason to celebrate is open to question. Some retirement experts view 401(k)s as hopelessly inadequate to meet the retirement needs of average Americans, while others view them as just beginning to hit their stride, citing improvements such as auto enrollment, auto escalation and better investment education provided by plan sponsors.

    Much better off

    Fans of 401(k)s say that workers are much better off today than they were with traditional pension plans. Only about 10% of workers in a traditional defined benefit plan actually received a full benefit at retirement age from the plan due to job changes or leaving the workforce, said Olivia Mitchell, a professor of business economics and public policy and executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania in Philadelphia.

    Defined contribution plans, in contrast, are portable, meaning whatever money is in the account belongs to the participant regardless of job changes.

    401(k) critics, in turn, point to the meager retirement savings employees have been able to set aside, saying that workers often can't afford to make contributions and don't have the knowledge or support they need to make sound financial decisions about how to invest their retirement funds.

    "The amount of money that people will fall short of when they seek to retire under the current 401(k) system is over $4 trillion," Ms. Lucas said.

    Fans and critics do agree on one thing, however: Not enough Americans have access to 401(k) plans. They bemoan the fact that only about half of workers are participating in private-sector retirement plans, according to many experts.

    "401(k)s are not ubiquitous. They're not broad-based," said Jack Towarnicky, Columbus, Ohio-based executive director of the Plan Sponsor Council of America, explaining that not all employers offer the plans and those that do are not required to make them available to part-time workers and contract workers.

    "This is clearly not a perfect system. There is more that could be done to get people into the system," Ms. Lucas noted.

    Retirement experts also acknowledge that participants don't always make good decisions. Many don't enroll in employer 401(k) plans, even when company matching contributions are offered, and if they do, they often contribute at low rates. Many are also ill-equipped to make decisions about how to invest their savings, often pulling money out of stocks when the market drops and buying them back at much higher prices when it rises.

    During the recent market downturn last month, for example, participants transferred their money out equities and into bonds, according to the Alight Solutions 401(k) index, a barometer of 401(k) trading activity. The data showed that on Nov. 20 — the day the Dow Jones industrial average dropped by more than 2.2% — trading activity was more than twice the average amount with the vast majority of funds being transferred to fixed-income instruments from equity funds.

    "If you're giving the average Joe and Jane on the street the keys to the car and saying 'you're in charge of your investment vehicle,' know that people aren't experts on this and they're going to make these somewhat suboptimal decisions with selling at the wrong time and buying at the wrong time," said Rob Austin, the Charlotte, N.C.-based head of research at Alight.

    Paltry amounts for many

    Whether due to poor investment choices or lack of participation, the amounts many individuals have in 401(k) accounts are paltry. In 2016, the typical working household headed by someone between 55 to 64 had a median of $135,000 in 401(k) and IRA balances, according to the Center of Retirement Research at Boston College. Those headed by individuals 45 to 54 had $97,000, while those headed by people 35 to 44 had only $40,000.

    Income significantly influenced how much households were able to save.

    Households in the top 20%, for example, were substantially better off than most others as they posted a median 401(k) and IRA balance of $780,000. Those in the lowest 20%, in contrast, had only $26,700.

    "I think the 401(k) works well for higher-income people who start saving early, but for half of the population it really is an inadequate mechanism," said Alicia Munnell, director for the Center for Retirement Research.

    Still, she and most experts agree there's no going back to the days of traditional pensions.

    "People wax nostalgically about the defined benefit plan, but I don't think the defined benefit plan was going to be sustainable as the nature of the workforce changed," Ms. Munnell said, referring to the increase in worker mobility.

    Plus, many are quick to note, a lot of pension funds face severe funding issues.

    "The funding shortfalls that are plaguing many corporate plans and many state and local plans are not seen in the defined contribution environment," Ms. Mitchell said.

    Skeptics nevertheless remain unconvinced.

    "The 401(k) was an experiment about whether people could save for their retirement in a consistent way without employers being required to give them any help. The experiment really has failed," said Teresa Ghilarducci, an economist and director of The Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York.

    In recent years, Ms. Ghilarducci and Hamilton E. "Tony" James, executive vice chairman of Blackstone Group LP, have pushed their plan to enhance retirement security. It calls for mandatory retirement savings accounts that would require employers and employees to each contribute 1.5% of pay into government guaranteed accounts that would be managed by approved asset managers and paid out as an annuity.

    Lobbied for changes

    The retirement industry, too, has lobbied for changes to address the shortcomings of 401(k)s. In 2006, Congress passed the Pension Protection Act, legislation that made it easier for companies to auto enroll employees, escalate their contributions and default them into professionally managed target-date funds.

    "All those three things have made it much easier for workers to save and invest at low cost for retirement than used to be the case," Ms. Mitchell said.

    Still, much more needs to be done, according to many retirement experts.

    Mr. Benna, the architect of the 401(k), would like to see legislation requiring employers to automatically enroll employees and bump up their contributions by 1% of pay annually until they reach 6%.

    He would also like to see solutions to the issue of 401(k) leakage, the premature cashing out of 401(k) accounts when employees change jobs. Even small-balance cashouts matter, particularly when they occur early in a career, retirement experts say.

    The retirement industry is also pushing for ways to improve access to 401(k) plans. One proposal by the Department of Labor would give small businesses a greater ability to band together to offer their employees 401(k)s through open multiple employer plans. States as well are taking steps to broaden access, with a handful launching private-sector retirement savings programs. Under such programs, employees can save via payroll deductions into an IRA.

    For a growing number of experts, though, the biggest issue on the horizon for 401(k)s is one that has hardly been addressed: how to help people spend down their retirement assets in a prudent manner.

    Many retirees have trouble figuring out how to spend their funds in a way that allows them to cover their expenses without running out of money before they die, according to Ms. Mitchell.

    "They don't know how to auto-invest the money in later life," she said.

    Ms. Mitchell proposes that employers include a default deferred annuity into the 401(k) at retirement. As she envisions it, employees would have 10% of their 401(k) balances automatically placed in a deferred annuity, which they would receive at 80 to 85. It would apply to 401(k) account balances of $65,000 or more.

    In the end, 401(k)s may come full circle as they start looking more and more like traditional pensions, according to experts.

    It's about putting the "pension back" into 401(k) plans, Ms. Mitchell said.

    Related Articles
    IRS announces hike in DC plan contribution limit
    Legislation introduced with changes to retirement savings tax credit and return…
    Experts optimistic over auto-portability proposal
    Retirement behemoth started with a fluke
    Experts optimistic over auto-portability proposal
    'Missed opportunity' on retirement legislation as Congress prepares to adjourn
    Companies now offering workers a true unbiased eye
    LIMRA: Less than half of small U.S. employers offer retirement benefits but rec…
    Recommended for You
    Pentegra launches pooled employer plan
    Pentegra launches pooled employer plan
    Ascensus taps MassMutual alum as new FuturePlan president
    Ascensus taps MassMutual alum as new FuturePlan president
    Economic Group Pension Services scoops up third-party administrator
    Economic Group Pension Services scoops up third-party administrator
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center