A new U.S. government report paints a bleak retirement picture for today’s teenagers, finding that 37 percent of those workers born in 1990 likely will have no 401(k) savings when they reach retirement age in 2050.
Workers born then would save enough in their defined contribution plan over their career to average $18,784 per year in 2007 dollars, or 22.5 percent of their annual pre-retirement income, according to U.S. Government Accountability Office (GAO) projections.
The dire projections come from a recent GAO report, and are even worse for workers born in 1990 who are in the lowest income quartile. They will save only enough to replace an average of $1,850, or 10 percent, of their pre-retirement income. The GAO estimates that 63 percent of those workers will have zero plan savings when they retire.
The findings, which look at 401(k) savings of older workers as well, are based on the GAO’s analysis of data from the Federal Reserve Board’s 2004 Survey of Consumer Finances (SCF)—the latest available—and a computer simulation model used to project defined contribution plan balances at retirement. The GAO also reviewed academic studies and interviewed experts.
Its analysis did not factor savings in traditional pensions or from other sources.
The majority of workers in all age groups are not participating in defined contribution plans with their current employers, the GAO found. Such plans place the primary responsibility for saving for retirement on employees instead of employers.
There are various reasons for this, the GAO points out, such as receiving limited or no employer contributions to their plan.
“Employers do not always offer retirement plans, and when they do, plans may have eligibility restrictions initially, and some eligible workers do not choose to participate,” it points out in the report.
Less than two-thirds (62 percent) of all workers were offered a retirement plan by their employer; of those who were offered the opportunity, 84 participated, according to the GAO.
Other workers withdraw their savings before retirement or just don’t choose to participate. Only 36 percent of workers participated in a current defined contribution plan, with $22,800 the median account balance among all workers with such a plan, including rolled-over retirement funds.
While the GAO didn’t make any recommendations in its report, it noted the following actions that could boost projections for savings among young workers:
• Delaying retirement by three years. This would raise annuity income from defined contribution plans by 20.9 percent on average and increase annuity levels somewhat evenly across income groups.
• Automatic enrollment for a 401(k) or similar retirement savings plan. In 2004, 12.4 percent of 401(k) plans were enrolling participants automatically, and 17.5 percent of plans did this in 2005.
• Rolling over retirement savings into a new retirement plan automatically when workers leave a job. This would increase projected retirement savings by 11 percent on average.
The report was prepared at the request of Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee. Miller has written legislation calling for providing U.S. workers with complete information on fees that could be cutting into their 401(k)-style retirement savings.
“Unless we act now, too many workers just starting their careers today will unfortunately face a less secure retirement than did many of their parents,” he said in a Dec. 11, 2007, press release.
The Profit Sharing/401(k) Council of America (PSCA), however, questions the validity of the GAO’s findings, stating that in 2005 measures were implemented that “drastically [change] how employers handle small plan assets when an employee terminates employment so that retirement assets are defaulted to an IRA or retained in the plan.”
Also, the GAO report “does not quantify the future impact on defined contribution savings-related behavior” that resulted from The Pension Protection Act of 2006, the PSCA said. That law, it said, “paved the way for a dramatic growth in automatic enrollment” and resulted in many new savers.
It criticized the GAO report for acknowledging and then dismissing other studies, and it observed that the GAO projections include individuals who are not participating in a retirement plan.
“That’s akin to judging the efficacy of a medicine by including patients who do not take it,” PSCA President David Wray said in a press release.
“Employers bend over backwards to get all employees to save, including offering lucrative matching contributions, and the law limits benefits for higher-paid workers unless lower-paid workers participate,” he said, calling the system “remarkably successful in creating new savings by low- and middle-income workers.”
The PSCA urged Congress to not take any action based solely on the GAO report and to consider other studies, including a 2007 study from the Congressional Research Service, before creating “a legislative response that could result in fewer American workers saving in an employer-provided retirement plan.”
Kathy Gurchiek is associate editor for HR News. She can be reached at kgurchiek@shrm.org.