401(k) balances highlight major wealth gap, GAO says

State auto-IRAs and provisions of the Secure 2.0 Act could help, but there are numerous factors underlying wealth inequality.

A review of 401(k)s shows account balances that are emblematic of widening wealth inequality among older Americans, the Government Accountability Office said in a report Thursday to Congress.

The account type, which is often championed as an important savings tool for the middle class, is utilized far more by those with income in the top 20%. While about 90% of people age 51 to 64 who were in the highest income quartile in 2019 had assets in a 401(k), that was the case for about 10% of workers in the lowest income quartile, the GAO found. While participation rates for the highest earners have remained mostly steady since 2007, they have decreased by half for low-income workers, according to the report. Meanwhile, participation rates for workers in the middle have been relatively flat, at just over 60%.

Median account balances grew $330,000, to $605,000, for households in the highest income quartile between 2007 and 2019, but they did not change significantly for the middle and lowest-income groups, which had balances of less than $100,000 and less than $50,000, respectively.

By race, 401(k)s are used much more commonly in the 51 to 64 cohort by white workers than Black and Latinx savers, at over 60%, versus 40% and 30%, respectively. Since 2007, participation by whites has been steady, but it has declined for Black and Latinx workers.

Median balances were also significantly higher for white households, at $164,000, than for all other races, at $80,300, according to the GAO.

There are numerous factors that contribute to wealth inequality, such as major disparities in home values and equity. But having a job that provides a 401(k) is one.

“Closing the access gap is one of the most important ways to reduce the inequities within our current retirement system,” Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University, said in an email. About 57 million workers lack access to employer-sponsored plans, with most of that population earning less than $50,000, working at companies with fewer than 20 employees and disproportionately non-white, according to figures from the center.

The lack of access to employer-sponsored retirement plans, particularly for workers at small businesses, has led numerous states to develop automatic IRA programs or other initiatives. In the seven states that have programs up and running, total assets in the accounts are nearly $1 billion, according to Georgetown’s Center for Retirement Initiatives.

“By focusing on closing the access gap, state-facilitated retirement saving are now giving these underserved populations an opportunity to save. The growth of the state programs, soon to reach $1 billion in assets administered and 1 million funded accounts with many more still to launch, demonstrates that when given the opportunity, more will save,” Antonelli said. “And despite the fact that these populations face additional economic challenges, they participate and benefit at a higher rate because of the use of auto-enrollment in these programs.”

The GAO prepared the report at a request of members of Congress, who asked whether tax incentives of traditional 401(k)s disproportionately benefit high-income workers and potentially contribute to wealth inequality. Lawmakers occasionally review the pretax contribution status of 401(k)s, although any attempts to do away with the tax treatment are viewed as politically unpopular and unlikely to pass. For 2022, there was “nearly $200 billion in forgone revenue” associated with 401(k)s, according to the report — but that figure relies on the 10-year budgetary window used by Congress, which essentially ignores the fact that assets in retirement plans will be taxed further down the road.

To study 401(k) use, the GAO analyzed data from the most recent available Survey of Consumer Finances, which was for 2019.

Aside from the use of government-facilitated savings programs, national versions of which the GAO noted had some success in several countries, something that could slightly help increase plan participation is automatic enrollment, according to the report.

In additional to state-run auto-IRAs, more workers will be enrolled in 401(k)s starting in 2025 as a result of a requirement in the Secure 2.0 Act that new plans default employees in at between 3% and 10% of their compensation, ratcheting that up automatically by 1% every year until the total rate reaches from 10% to as much as 15%.

Automatic enrollment could help increase participation in 401(k)s by as much as 33%, but the effects on lower-income workers are limited, as only 23% currently have access to plans, according to the GAO.

By contrast, proposals to increase the annual contribution limits for 401(k)s would have little effect for low-wage earners. The current limit, not including catch-up contributions, is $22,500 annually. And some wealthier households are favoring taxable accounts instead of 401(k)s and IRAs.

“Increasing contribution limits for workplace retirement accounts almost entirely benefits high-income workers, as about 23% of high-income compared with about 3% of middle-income older workers contribute the individual limit,” the GAO stated.