401(k) revolution cracks notion of nest egg
How's your 401(k) doing? Working Americans ask themselves this question -- and angst about the answer -- a great deal these days.
And why not? For most Americans, retirement reality has turned chillingly stark: Either you have a robust set of investments in your 401(k) or you're facing some really rocky happy years.
A generation ago, working Americans didn't have to obsess about retirement savings accounts. Americans had pensions back then, not 401(k)s. These pensions represented a commitment from employers to workers: You work here a set number of years, you can count on a monthly pension at a set amount.
In these traditional pension plans, the risk rested with employers. They shouldered the responsibility for funding a pension plan's "defined benefits."
With 401(k)s and the like, employees have no promised "defined benefit." Their future retirement income depends on how well their 401(k) investments end up doing, not how long or how diligently they've worked over the course of their careers.
In other words, the retirement risk has shifted, from employer to employee.
Our current 401(k)s actually began in the 1980s as a supplement, not a substitute, to traditional pension plans.
But America's top corporate execs quickly came to see these investment vehicles as a cheaper -- for employers -- alternative. Between 1990 and 2010, the share of America's private-sector employees in traditional pension plans fell by nearly half, from 42 to 22 percent.
This huge drop-off in traditional pension participation, says a new Economic Policy Institute report, is generating both angst and inequality.
Among America's most affluent 20 percent, 88 percent have savings sitting in a 401(k) or similar retirement savings account. The savings in the accounts of these affluent Americans averaged $308,674 in 2010, the most recent year with data.
In America's statistical middle class, by contrast, a totally different reality. Only 52 percent of Americans in the middle fifth of the nation's income distribution have savings in retirement accounts, and these accounts average only $34,981.
And America's poorest fifth has an even bleaker retirement outlook. Only 11 percent of those Americans have any 401(k) savings, and these savings average just $7,543.
These unequal outcomes should surprise no one. Participants in 401(k)s and similar plans have to contribute to participate. In an era of shrinking real paychecks, many employees simply can't afford to set aside much, if any, money for their retirement.
Those Americans with comfortable incomes who can afford to set aside the maximum possible savings in their 401(k)s go on, in turn, to benefit from both the standard employer's 401(k) matching contribution and the tax breaks that all 401(k) savings enjoy.
The predictable result: The gap between the affluent and everyone else stretches even wider.
We have moved, in short, from a traditional pension system where "many retirees could count on predictable, constant streams of income," as the new EPI study notes, to a system where most Americans can't afford to retire.
"For a large swath of America," Marketwatch analyst Matthew Heimer adds, Social Security has become "the only remaining financial crutch for retirement."
In the meantime, many of the same corporate execs who've cut back on traditional worker pension coverage are spearheading the charge for cutbacks in Social Security.
Last fall, my Institute for Policy Studies colleagues looked at the 71 big-time CEOs pushing the "Fix the Debt" campaign to trim Social Security and other major federal "entitlement" programs. These 71 top execs have accumulated, on average, $9 million each in their own personal company pension plans.
A dozen of these CEOs have more than $20 million in their pension accounts.
If at age 65 these dozen converted their assets to an annuity, the Institute for Policy Studies researchers note, "they would receive a monthly check for at least $110,000 for life."
OtherWords columnist Sam Pizzigati is an Institute for Policy Studies associate fellow and author of "The Rich Don't Always Win."