Why 401 (okay) Plans Will not Remedy the US Retirement Disaster

Kyla Ernst-Alper is an aerialist based in New York City. She has never had an employer offer her a 401 (k) retirement plan in more than two decades.

Giles Clement

Kyla Ernst-Alper, a 38-year-old aerial photography artist in New York City, has never had a 401 (k) retirement plan.

She has multiple jobs at the same time to support herself, and none of them offer her an opportunity to retire. She puts as much as possible into an individual retirement account, but these savings are not always consistent. That’s because of their work, which was particularly hard hit when live shows were canceled due to the public health crisis.

“Before the pandemic, the people in my community hardly paid their bills,” said Ernst-Alper. “You’re in luck if you can save money.”

The 401 (k) is the number one way Americans save for retirement today, especially as traditional annuities become rarer. However, a large proportion of workers, particularly low paid, women and people of color, are lagging behind due to lack of access to plans.

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Overall, according to the Center for Retirement Research in Boston, around half of employees in the private sector are not covered by an employer-sponsored pension plan, either because their company doesn’t have one or because they are not eligible for the college. Additionally, a growing number of American workers generally cannot access a 401 (k) because they are contractors or self-employed.

Those who do not have access to an employer-sponsored plan can fall behind with no perks such as corresponding employer contributions or automatic employee registration. As a result, one in four American workers saved less than $ 10,000 for retirement.

“For many populations, the typical working-age household has little or no retirement savings,” said Monique Morrissey, an economist at the left-wing Economic Policy Institute.

You will be at a higher risk of poverty in retirement.

Catherine Collinson

CEO and President of the Transamerica Center for Retirement Studies

While experts say 401 (k) plans have problems but shouldn’t be discontinued. When used, they can be powerful savings – the average 401 (k) stake for an investor in their twenties in 2019 was $ 10,500, according to Fidelity. An average of $ 38,400 was saved in their thirties, while an average of $ 93,400, $ 160,000, and $ 182,100 were saved in their forties, fifties, and sixties, respectively.

“I’m not saying, ‘get rid of 401 (k) plans,'” said Steve Vernon, a consultant researcher at the Stanford Center of Longevity. “I just mean that they need to be improved.”

That improvement should come in the form of better access, said Nevin Adams, chief content officer for the American Retirement Association.

In fact, when people get the chance to save on a 401 (k), they take it. According to a survey by the Plan Sponsor Council of America, nearly 90% of employees who had access to a 401 (k) at work in 2019 made contributions to their plan

Here’s who the plans are currently leaving behind. (Many people fall into several categories.)

Small business owner

Large companies are far more likely than small companies to offer their workers a 401 (k) plan, said Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies.

While 92% of companies with 500 or more employees offered a 401 (k) or similar plan in 2019, only 57% of companies with fewer than 99 employees did so, according to a survey by the Transamerica Center.

“Employers who don’t offer plans are typically new, small, relatively few employees, and / or employ temporary, temporary, part-time, and / or low-wage workers,” said Angie Chen, assistant director of savings research at the Center for Retirement Planning at Boston College wrote in an email.

Many of these workers don’t have the time to advocate change.

“These employees often have urgent financial needs that tend to crowd out the demand for employer-supported pensions,” said Chen.

Low and middle income workers

Those with higher incomes are far more likely to be offered a 401 (k) at work than those with lower incomes, which only exacerbates pension inequality.

More than 70% of workers with household incomes greater than $ 100,000 have access to a 401 (k), compared to 50% of workers with household incomes less than $ 50,000, according to Transamerica.

“Income differentials and access to retirement benefits suggest that lower-income workers will inevitably have to rely on social security for a larger portion of their retirement income,” said Collinson. (The average social security check is less than $ 1,400.)

“You will be at a higher risk of poverty in retirement.”

Gig and part time workers

Danny Samet, 28, has been saving for retirement through a number of different investment accounts, he said. As a freelancer in the music industry, he has never had an employer-sponsored retirement account.

Chase Kensrue

401 (k) plans are mostly associated with traditional full-time employment.

However, research has shown that the proportion of American workers doing temporary or unsafe work is growing rapidly.

Many of these workers who earn their living with apps or who only work freelance for companies do not have access to a company pension scheme. In fact, only 41% of part-time workers were offered a 401 (k) plan by their employer, according to the Transamerica survey.

While it is possible to establish and contribute to what is called a Solo 401 (k) without having to induce an employer to join functions or automatically log in, many gig employees forego these options.

Danny Samet from Cincinnati has always been a freelance tour manager and merchandiser for bands, jumping from one gig to the next. He’s never saved up on a company-sponsored retirement plan and thought he’d put everything he can away in a couple of different IRAs.

In his industry, most people would have no savings for their later years.

“There are many people who are not preparing for retirement,” said 28-year-old Samet.

Colored people and women

Jenny Lezan

Source: Jenny Lezan

Pew Charitable Trusts’ retirement project manager, John Scott, says that people of color and women are more likely to work in industries or occupations where they don’t have access to an employer-sponsored plan.

They also generally earn less than white men, which usually means they can save less over time.

Half of white working-age households have access to a 401 (k) or similar plan in their current workplace, compared with 37% of black households and 26% of Hispanic households, according to the EPI.

Jenny Lezan, of Naperville, Illinois, is not eligible for retirement plans at the school she teaches because she is an associate professor.

“I’m seen as a contract worker,” said the 35-year-old Lezan. “I don’t have any pension funds right now, which, to be honest, is pretty scary.”

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