America’s retirement system is under-recognized for its achievements, but it still needs to improve

By Edmund F. Murphy III

The reality of the nation’s 401(k) system is that it performs remarkably well and is serving more people who are saving more money than ever before.

In light of criticism from those who wish to eliminate or significantly alter the 401(k), it’s best to show how it is effective and offer some areas for needed improvement.

Consider:

• Increasing numbers of workers and retirees are covered: According to Investment Company Institute data,¹ today there more than 110 million American workers and retirees who have amassed some $9 trillion in wealth making use of these plans as savings vehicles or as draw-down instruments to help support them in their golden years.  Before the 401(k) only 28% of workers had retirement savings and were heavily dependent on their own savings and Social Security as  retirement income sources.

The point of a retirement plan is to replace the income one made during their working years so they can maintain the lifestyle they have enjoyed throughout their life. On average these replacement rates are 70%, which is an enviable statistic.

• Workers at all income levels are saving more: 401(k) plans offer the American workforce - of all income levels - the ability to engage in an effective savings program and participate in their investment future.

Forthcoming research from Empower shows that among families with retirement savings, the median value of retirement accounts nearly tripled over 30 years, on an inflation-adjusted basis.²

During that period, retirement savings for middle-income families more than doubled and lower middle-income and the lowest income families experienced similar dramatic increases in retirement savings.  Lower middle-income families experienced a 183% growth in mean account value (from $24,880 in 1992 to $70,410 in 2022).³ Families in the lowest quintile of income experienced a 207% increase in mean value of their retirement accounts (from $32,200 in 1992 to $98,700 in 2022).⁴

• The 401(k) drives engagement: A survey conducted in fall 2023 found that 75% of survey respondents with household income under $30,000 who owned a defined contribution account agreed that their employer-sponsored retirement account helps them think about the long term and not just current needs.⁵ That figure rises to 91% for those with household incomes ranging from $30,000 to $49,999, and 86% for those with household incomes ranging from $50,000 to $99,999.
• Auto features overcome bad behavior: The great innovation built into the 401(k) system is that it helps individuals overcome behavioral hurdles through the use of automatic savings features. Automatic paycheck deferrals, auto-enrollment and auto-escalation are features that have proven to work at keeping savers on track for retirement.

About 62% of businesses with a 401(k)-plan used automatic enrollment in 2020, up from 46% a decade ago, according to the Plan Sponsor Council of America.⁶ Another study found that 92% of new hires were still saving in the 401(k) plan three years after being automatically enrolled; in plans with voluntary enrollment, just 29% were still saving.

Every retirement plan must have auto features.

Advice is the proven cornerstone of retirement:  When individuals receive professional advice, they tend to save 22% more than they otherwise would. During periods of market volatility, those individuals making use of a retirement managed account show strong resilience, with 99.5% of survey respondents maintaining their managed account.⁷

The modern retirement plan is an avenue to receiving advice and people who use it are the most successful retirement investors.

A blueprint for improvement

Success  factors aside, the retirement system as a whole needs constant improvement. Here’s my blueprint.

• Fix Social Security:  The great partnership with policymakers works well, but the lack of serious attention to Social Security is a significant problem.  Anyone who wants to claim we’re in a “retirement crisis” and ignores the Social Security mess is being dishonest.

The next Congress and the Executive Branch need to prioritize this.  Social Security reform, combined with the 401(k) system, together offer the best chance to help more Americans create financial security.

• Tax advantages drive savings; they must be retained: An ICI  survey also indicated that 68% of those with household income under $30,000 who owned a defined contribution account agreed that the tax treatment of their retirement plan is a big incentive to contribute.⁸ 78% of those with household incomes ranging from $30,000 to $49,999 and from $50,000 to $99,999 agreed with that statement.

Policy proposals eliminating the tax advantages of the 401(k) should not be taken seriously.  Instead, we need greater incentives to save.

• Drive new plan adoption:  People who have access to a workplace plan tend to start investing for retirement. Research from ICI⁸ indicates that 56% of those who participate in a defined contribution plan through their job say they would not save for retirement if they did not have a plan at work.

According to the Small Business Administration, there are an estimated 33.2 million small businesses in the United States and approximately 62 million individuals who work for these employers.⁹ These employers represent many of the estimated 33 percent to 50 percent of private sector workers who are not currently covered by a workplace retirement plan.

The rise of state-sponsored auto IRA plans, in conjunction with innovation from 401(k) industry players, and federal policy improvements such as the recent 2019 SECURE and 2022 SECURE 2.0 Acts continue to be helpful toward this trend. We need to do more.

As of September 30, 2023, there were an estimated 710,000 401(k) plans, according to ICI.1 The current $31 trillion retirement market could grow to as much as $47 trillion by 2028 totaling approximately one million plans by then, according to recent Cerulli data.¹¹

Working with Congress, a mandate for employers to offer a retirement plan is essential.

• Collaboration is the key: The truth is the 401(k) of 1984 was nothing like the 401(k) of 2024. Successful policy improvements such as the SECURE Acts have driven great innovation into the workplace retirement system. Employers, advisors, consultants, policy makers and providers must continue to work together to drive the constant improvements that the workforce needs. These partnerships have paved the way for the creation of new plan innovation including auto features, MEPS, PEPs, tax incentives to promote plan creation and numerous other improvements.  All of this is driven by a commitment to investing in the technology and innovation that drive the workplace system.

Since the 401(k) began there has been a terrific diversity of ideas and changes that have improved the retirement system to meet the needs of the modern workforce. In partnership with Congress, employers and workers must continue to leverage great innovation to build on these successes together.

Edmund F. Murphy III is the president and CEO of Empower, a provider of retirement and wealth management services to 18 million Americans.