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401(K) Fail: Shift Away From Pensions a 'Disaster'

New paper shows need to strengthen Social Security as shift to 401(k) plans means more inequality

Andrea Germanos, staff writer

The shift from traditional pensions to 401(k) retirement plans has been a "disaster," fueling inequality and creating more insecure retirement for most Americans, a new paper from the Economic Policy Institute shows.

While traditional pensions put the risk onto employers because they are generally responsible for funding benefits regardless of investment returns, with 401(k)-type plans employers are shielded from long-term liabilities, instead putting investment risks on participants and not offering the predictable income traditional pensions do.

There have been winners in this shift—high-income earners, write authors Monique Morrissey and Natalie Sabadish.  The high-income earners participate more often than lower-income Americans to 401(k)s, and have a cushion to take higher investment risks. 

The paper shows that "Households in the top income-fifth accounted for 72 percent of total savings in retirement accounts in 2010 and were the only income group that had more than their annual income saved in these accounts."

In contrast, in many demographic groups, including black and Hispanic households and single people, the typical household holds no savings in retirement plans.

“401(k)s were never designed to replace pensions for most workers," Morrissey stated. "They serve primarily as a tax shelter for high earners. 

"The 401(k) revolution has been a disaster, yet some policymakers are calling for cuts to Social Security, which will be the only significant source of retirement income for most Americans—if they are able to retire in the first place,” she said.

Therefore, the authors conclude, Social Security must be preserved and strengthened.

A handful of the charts from the paper offer a closer look at the shift from pensions to 401(k)-type accounts and the unequal distribution of savings within retirement plans:

(Note: “Defined-contribution” plans refer to plans like 401(k)s, and “defined-benefit” refers to pension plans.)


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The mean (average) is skewed, because, the authors note, it is "driven by a small number of households with large balances."  The much lower median figure shows the savings of a typical household:

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