Savings in DC plans increase, but outcomes remain ‘bleak’

Only the top 40% of near-retirement 401(k) participants by income have enough saved for retirement

Near-retirees had a median $144,000 squirreled away in 401(k)s and IRAs in 2019 — an amount that is projected to be woefully insufficient for most people.

That total amount of savings is 7% higher than the median $135,000 reported in 2016 among households with people ages 55 to 64, though the higher figure will still only result in monthly income of about $570 in retirement, according to a brief from the Center for Retirement Research at Boston College published Tuesday.

Further, retirement plan access and participation rates were virtually unchanged over 30 years. Last year, 51% of all workers ages 25 to 64 had a retirement plan available through their employer, compared with 50% in 2006 and 49% in 1989, according to Survey of Consumer Finances data analyzed in the report. Participation in 401(k)s has risen considerably since 1983, though traditional pension plans were much more common at the time. In that year, 57% of people who had access to a 401(k) participated in it, compared with 75% in 1998 and 81% in 2019, according to CRR.

“Overall, the system provides meaningful balances for only the top two income quintiles of households with 401(k)s. Moreover, only half of all households have any 401(k)-related holdings,” the brief read. “This somewhat bleak assessment of the nation’s employer-sponsored retirement system can only have been worsened by COVID-19 and the ensuing recession.”

Savings are much lower among 55- to 64-year-old households in the bottom income quintiles, with those in the lowest having a median of just $32,200 in 401(k)s and IRAs, and those in the second quintile having $75,000, the report found. Those in the third quintile had a median of $97,000, compared with $289,000 and $805,500 in the fourth and fifth quintiles, respectively.

There was also a surprising drop in 401(k) use in the lowest-income group of people ages 55 to 64, at 21% in 2019, down from 25% in 2016, according to CRR.

Low 401(k) balances are a symptom of an immature savings system, the authors noted. But the fact that saving is not mandated or more strongly encouraged by the government is a big contributor to the issue, they wrote.

“Employers must either provide a plan themselves or be required to auto-enroll their employees in a retirement savings program initiated by government,” the paper read. “Burgeoning auto-IRA programs at the state level — in California, Illinois and Oregon — are a first step down this path.”

Total assets in defined-contribution plans were about $7.4 trillion as of the end of 2019, compared with $11 trillion in IRAs and $3.5 trillion in traditional defined-benefit plans, according to Federal Reserve data cited in the report.

While there has been much attention on the growth of the savings system, only recently has there been consideration for spenddown options for retirees, the authors noted.

In-plan annuities have not caught on significantly in the 401(k) business, particularly as part of a default investment option. However, more plan sponsors could add such options in the coming years, as guidance from the Department of Labor and provisions of the SECURE Act sought to encourage more annuity use within 401(k)s.

Retirement savers “face the risk of either spending too quickly and outliving their resources or spending too conservatively and depriving themselves of necessities,” the report stated. “Participants need an easy and cheap way to transform their accumulated balances into lifetime income. Using 401(k) balances to defer claiming Social Security, which results in larger monthly benefits, should be a big part of the solution.”

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