The 401(k) Is Wreaking Havoc on Retirement

Source: Ben Steverman Bloomberg News, August 24, 2016

….In 1980, 38 percent of private sector workers had a pension and 19 percent a 401(k). By last year, according to the U.S. Department of Labor, the numbers had more or less reversed—just 15 percent had a pension and 43 percent a 401(k).

That shift is creating “double disadvantages for the less educated,” wrote University of Kansas sociology professor ChangHwan Kim and U.S. Social Security Administration researcher Christopher Tamborini in a paper presented at the American Sociological Association’s annual conference on Tuesday.
The authors analyzed surveys linked to W-2 tax data to figure out how much Americans with varying levels of education were saving in their retirement accounts.

Among workers who hold similar jobs with the same pay and who both contribute to 401(k) plans, a college graduate tends to save 26 percent more than a worker with just a high school diploma, the study concluded.

Workers with college degrees aren’t only far more likely to hold jobs that offer retirement plans. When offered the plans, they’re also far more likely to sign up and to contribute enough to retire comfortably.

The median private sector worker without a college degree is contributing nothing to a retirement plan, while the median college graduate pitches in more than $2,000 a year, the study found.

One reason is that less educated workers are likelier to hold lower-paying jobs that don’t offer retirement plans. According to the study, 83 percent of workers with a bachelor’s degree have access to some kind of retirement plan—compared with 62 percent of high school graduates and 43 percent of high school dropouts.

Even when they are offered 401(k)s, less educated workers find it much more difficult to take full advantage of them…..
Study Finds Changes to Retirement Savings System May Exacerbate Economic Inequality
Source: American Sociological Association (ASA), Press Release, August 23, 2016

A shift to defined-contribution retirement plans, such as 401(k) plans, has led to an income and education gap in pension savings that could exacerbate future economic inequality, according to a study that was presented at the 111th Annual Meeting of the American Sociological Association (ASA).

“The movement towards voluntary, contributory employer pensions has increased the influence of socioeconomic factors, such as education and income levels, on retirement fund accumulation,” said study co-author ChangHwan Kim, an associate professor of sociology at the University of Kansas. 

Unlike defined-benefit plans, which promise a fixed, pre-established monthly benefit for employees upon retirement, defined-contribution plans entail monthly contributions from employees, and sometimes employers, which are then invested on the employee’s behalf. The final amount an employee receives upon retirement depends on total lifetime contribution to his or her account, plus investment gains or losses.

A key difference between defined-contribution plans, which have been growing in popularity since 1980, and defined-benefit plans is that workers may choose to opt out of participating in the former.

When defined-contribution plans are offered in workplaces, people with a bachelor’s degree or higher are 1.2 times more likely to enroll in them than high school graduates even after controlling for the effect of annual earnings, occupation, industry, firm size, and other characteristics, the study found. 

Furthermore, people with a bachelor’s degree or higher save an average of 26 percent more annually to their defined-contribution retirement accounts than participating high school graduates even if both groups earn the same amount of annual income.

The State of American Retirement: How 401(k)s have failed most American workers
Source: Monique Morrissey, Economic Policy Institute, Retirement Inequality Chartbook, March 3, 2016

From the overview:
Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a pronounced shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional pensions (see “Types of retirement plans,” below). This chartbook assesses the impact of the shift from pensions to individual savings by examining disparities in retirement preparedness and outcomes by income, race, ethnicity, education, gender, and marital status.

The first section of the chartbook looks at retirement-plan participation and retirement account savings of working-age families. The charts in this section focus on families headed by someone age 32–61, a 30-year period before the Social Security early eligibility age of 62 when most families should be accumulating pension benefits and retirement savings. The second section looks at income sources for seniors. Since many workers transition to retirement between Social Security’s early eligibility age and the program’s normal retirement age (currently 66, formerly 65), the charts in the second section focus on retirement outcomes of people age 65 and older.