401(k) plans as ‘personal’ defined benefit plans

by. Tom Eckert

In 2011, the U.S. Government Accountability Office published a report that indicated 401(k) plans mostly benefit high wage earners and the wealthy. The report focused primarily on skewed tax benefits, which makes sense given the progressivity of the Federal tax code. Indeed, workers who earn more and pay taxes at a higher marginal rate will benefit most from tax deferral. Other studies have reached beyond tax benefits to explore differences in accumulated wealth in 401(k) plans among workers in various wage tiers. Again, accumulated wealth tilts toward high wage earners for self-evident reasons.

Retirement plan service providers reflexively defend 401(k) plans in spite of clear evidence that their benefits favor high wage earners. We will also defend 401(k) plans, but do so in the spirit of providing a remedy to wealth disparities rather than to simply protect our turf. We believe 401(k) plans can be an effective option for retirement savings, but they need to take on greater institutional characteristics to function effectively as a primary retirement funding program.

By definition, the success of a self-directed retirement plan depends on the behavior of its participants. Much has been spent on development of education programs designed to create optimal behaviors to fund a financially secure retirement. In spite of good intentions, it hasn’t worked, and retirement savings deficiencies exist at all income levels. In our opinion, suboptimal participant behavior explains most of the challenges described in the aforementioned studies that characterize 401(k) plans as “programs for the rich.”

We embrace a new retirement savings model that seeks to address wealth accumulation disparities without scrapping the widely popular benefits of a 401(k) plan or transferring risk back to employers.

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