More Bad News on 401(k) Front

Seems the 401(k) red flags just keep waving. This latest report from Ben Steverman on the Bloomberg.com site — based on U.S. Census Bureau research — shows a whopping two-thirds of Americans aren’t putting money into any defined-contribution plans.

That’s right. Based on this research, which relies on tax data instead of surveys (as in the past), only about a third of workers are saving in a 401(k) or similar tax-deferred retirement plan.

What’s more, it now appears — using this new research methodology — that only about 14 percent of employers offer retirement plans at all! How can that be? As the report explains:

“Census researchers Michael Gideon and Joshua Mitchell analyzed W-2 tax records from 2012 to identify 6.2 million unique employers and 155 million individual workers, who held 219 million distinct jobs. This data produced estimates starkly different from previous surveys.

“For example, previous estimates suggested more than 40 percent of private-sector employers sponsored a retirement plan. Tax records uncovered a much bigger pool of small businesses, showing that, overall, just 14 percent of all employers offer a 401(k) or other defined-contribution plan to their workers.”

Bigger companies, the researchers say, are the most likely to offer 401(k) plans, and since they employ more people than small firms, they skew the overall number of U.S. workers who have the option. Gideon and Mitchell estimate that 79 percent of Americans work at organizations that sponsor a 401(k)-style plan. In the words of the report:

“The good news is that’s more than 20 points higher than previous estimates. The bad news is that just 41 percent of workers at those employers are making contributions to such a plan — more than 20 points lower than previous estimates.”

But should we all be trying to shepherd employees into 401(k)s? Earlier posts by me on this site suggest that’s a very good question. This one from January finds the creators and supporters of the retirement-savings vehicle now lamenting their creation. None of them imagined the vehicle would replace pensions, leaving workers struggling to ever contribute enough to their 401(k)s to retire comfortably.

As Herbert Whitehouse, a former human resource executive for Johnson & Johnson and one of the earliest proponents of the 401(k) for employees, tells the WSJ in that post, he and others were hoping and assuming back in 1981 — when the 401(k) was in its infancy — that the savings approach would be a kind of supplement to company pensions.

They did not imagine the idea would actually replace pensions as employers looked to cut costs and survive during subsequent downturns. As Whitehouse puts it in the WSJ story:

“We weren’t social visionaries.”

Then there’s this post a little later in January presenting the opinion of benefits expert Larry Sher, who thinks there’s even more corrupt and wrong with the savings vehicle than its merely replacing pensions. He blames the people who’ve had skin in the 401(k) game all along, who’ve been reluctant to give up their own benefits of the system — a system that forces employees to shoulder more responsibility and stress.

The chief concern of policymakers, employees and even some of the employers that have embraced the 401(k) concept, Sher says, “can be summed up as the total shifting of risks to employees — the risks that they won’t save enough, the risk that they will use the savings for non-retirement purposes, the risk of unfavorable investment results — culminating in inadequate retirement savings and the prospect of outliving such savings.”

Meanwhile, some states and cities have introduced local individual retirement accounts designed to encourage workers to save by requiring employers to either offer a retirement plan or automatically enroll their workers in the state- or city-sponsored IRAs.

The U.S. House of Representatives, however, voted to rescind those rules on Feb. 15, citing the IRA plans’ unfair competition to the financial industry. If the GOP-controlled Senate and President Donald Trump sign off on the move, all such auto-IRA plans would be placed in jeopardy, leaving people in the lurch once again. As Steverman writes:

“Whatever the outcome, any effort to get workers to save for retirement faces a daunting challenge: Can Americans spare the money? Student debt and auto loans are at record levels, according to Federal Reserve data released Feb. 16, and overall consumer debt is rising at the fastest pace in three years.

“Retirement is an important goal, but many Americans seem to have more pressing financial concerns.”