Why the 401 (k) can’t solve the U.S. pension crisis
Kyla Ernst-Alper is an aerialist based in New York City. She has never had an employer offer her a 401 (k) retirement plan in more than two decades.
Kyla Ernst-Alper, a 38-year-old aerial photography artist in New York City, has never had a 401 (k) retirement plan.
She has multiple jobs at the same time to support herself, and none of them offer her an opportunity to retire. She puts as much as possible into an individual retirement account, but these savings are not always consistent. That’s because of her work, which was particularly hard hit when live shows were canceled due to the public health crisis.
“Before the pandemic, the people in my community hardly paid their bills,” said Ernst-Alper. “You’re in luck if you can save money.”
The 401 (k) is the number one way Americans save for retirement today, especially as traditional annuities become rarer. However, a large proportion of workers, particularly low paid, women and people of color, are left behind due to lack of access to the plans.
More from Invest in You:
Walmart, other large companies are trying to recruit more youthful employees
Americans are more in debt than ever and “money disruptions” can be to blame
How Much Money Do You Need to Retire? Start with $ 1.7 million
Overall, roughly half of those employed in the private sector aren’t covered by an employer-sponsored retirement plan, either because their company doesn’t have one, or because they aren’t eligible for the college that is offered, according to the Center for Retirement Research in Boston. Additionally, a growing number of American workers generally cannot access a 401 (k) because they are contractors or self-employed.
Those who do not have access to an employer-sponsored plan can fall behind with no perks like matching employer contributions or automatic employee enrollment. As a result, one in four American workers has saved less than $ 10,000 for retirement.
“For many populations, the typical working-age household has little or no retirement savings,” said Monique Morrissey, an economist at the left-wing Economic Policy Institute.
You will be at greater risk of poverty in retirement.
CEO and President of the Transamerica Center for Retirement Studies
While experts say 401 (k) plans have problems but shouldn’t be discontinued. When used, they can be powerful savings tools – the average 401 (k) stake for an investor in their twenties in 2019 was $ 10,500, according to Fidelity. An average of $ 38,400 was saved in their thirties, while an average of $ 93,400, $ 160,000, and $ 182,100 were saved in their forties, fifties, and sixties, respectively.
“I’m not saying, ‘get rid of 401 (k) plans,'” said Steve Vernon, a consulting researcher at the Stanford Center of Longevity. “I just mean that they need to be improved.”
That improvement should come in the form of better access, said Nevin Adams, chief content officer for the American Retirement Association.
In fact, when people get the chance to save on a 401 (k), they take it. According to a survey by the Plan Sponsor Council of America, nearly 90% of employees who had access to a 401 (k) at work in 2019 made contributions to their plan
Here’s who the plans are currently leaving behind. (Many people fall into several categories.)
Small business owner
Large companies are far more likely than small companies to offer their workers a 401 (k) plan, said Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies.
While 92% of companies with 500 or more employees offered a 401 (k) or similar plan in 2019, only 57% of companies with fewer than 99 employees did so, according to a survey by the Transamerica Center.
“Employers who don’t offer plans are typically new, small, relatively few employees, and / or employ temporary, temporary, part-time, and / or low-wage workers,” said Angie Chen, associate director of savings research at the Center for Retirement Research at Boston College wrote in an email.
Many of these workers don’t have the time to push for change.
“These employees often have urgent financial needs that tend to crowd out the demand for employer-pension benefits,” said Chen.
Low and middle income workers
Those with higher incomes are far more likely to be offered a 401 (k) at work than those with lower incomes, which only exacerbates pension inequality.
More than 70% of workers with household incomes greater than $ 100,000 have access to a 401 (k), compared to 50% of workers with household incomes less than $ 50,000, according to Transamerica.
“Income disparities and access to retirement benefits suggest that lower-income workers will inevitably have to rely on social security for a larger portion of their retirement income,” said Collinson. (The average social security check is less than $ 1,400.)
“You will be at a higher risk of poverty in retirement.”
Gig and part time workers
28-year-old Danny Samet has been saving for retirement through a number of different investment accounts, he said. As a freelancer in the music industry, he has never had an employer-sponsored retirement account.
401 (k) plans are mostly associated with traditional full-time employment.
However, research has shown that the proportion of American workers doing temporary or unsafe work is growing rapidly.
Many of these workers who earn their living with apps or who only work freelance for companies do not have access to a company pension plan. In fact, only 41% of part-time workers were offered a 401 (k) plan by their employer, according to Transamerica’s survey.
While it is possible to establish and contribute to a so-called Solo 401 (k) without having to induce an employer to join functions or automatically log in, many gig employees forego these options.
Danny Samet from Cincinnati has always been a freelance tour manager and merchandiser for bands, jumping from one gig to the next. He’s never saved up on a company-sponsored retirement plan and thought he’d put everything he can away in a couple of different IRAs.
In his industry, most people would have no savings for their later years.
“There are many people who are not preparing for retirement,” said 28-year-old Samet.
Colored people and women
Source: Jenny Lezan
Pew Charitable Trusts’ retirement project manager, John Scott, says that people of skin color and women are more likely to work in industries or occupations where they don’t have access to an employer-sponsored plan.
They also generally earn less than white men, which usually means they can save less over time.
Half of white working-age households have access to a 401 (k) or similar plan in their current workplace, compared to 37% of black households and 26% of Hispanic households according to the EPI.
Jenny Lezan, of Naperville, Illinois, is not eligible for retirement plans at the school she teaches because she is an associate professor.
“I’m seen as a contract worker,” said the 35-year-old Lezan. “I don’t have any pension funds right now, which, to be honest, is terrifying.”
SIGN IN: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly.
CHECK: I started investing $ 50 a month when I was 19: now I’m working on saving over $ 1 million Grow with acorns + CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.