A new report from the Economic Policy Institute, a left-leaning think tank, takes aim at 401(k)s, claiming their poor design was an “accident of history” and that it exacerbates income inequality in retirement.
“Though assets in individual and pooled retirement funds have grown faster than income in recent decades, aggregates and averages can be misleading,” the report says.
Calling it “retirement insecurity,” the institute argues it’s worsened for most Americans as retirement wealth has become more unequal. For many groups, the median household has no savings in retirement accounts, and balances are low even when focusing only on households with savings.
“In 1980, a benefit consultant working on revamping a bank’s cash bonus plan had the idea of adding an employer matching contribution and taking advantage of an obscure provision in the tax code passed two years earlier clarifying the tax treatment of deferred compensation,” the report explains. “Though 401(k)s took off in the early 1980s, Congress did not intend for them to replace traditional pensions as a primary retirement vehicle, and 401(k)s are poorly designed for this role.”
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It notes that the shift from traditional defined-benefit pensions to 401(k)-style defined-contribution plans, in theory, could have broadened access to retirement benefits by making it easier and cheaper for employers to offer benefits. However, participation in any employer-based retirement plan declined over the past decade even as defined-contribution plans became prevalent in the private sector.