Automation has improved the 401(k) - but where do we go from here?
401(k) accounts are far from perfect as a retirement benefit, but they are getting better, and more improvements are on the way.
For better or worse, private-sector employers have largely substituted the 401(k) for the good old-fashioned defined-benefit pension in recent decades. Not all workers had traditional pensions even in their peak years, but those who did benefited from automatic participation, professional investment management and a guaranteed lifetime income stream when they retired. With a 401(k), you’ve got an employer-managed, tax-deferred retirement account that allows you to invest part of your salary in a variety of mutual funds. The risk and responsibility is all yours, and translating whatever you have saved into income is challenging.
The most significant improvements to these plans over the past couple of decades have added more automatic processes and decisionmaking. Since Congress passed the Pension Protection Act of 2006, a majority of plan sponsors have made enrollment automatic for workers when they start new jobs. Another improvement is the dominance of target-date funds, which automatically adjust the allocation of equities and fixed income as retirement draws near.
The changes have improved investor behavior. Among workers who have access to a plan, participation and savings rates are rising. That’s the good news. The flip side of this coin is a huge coverage problem. Only about half of private-sector U.S. workers are covered by a workplace plan at any given time, and most of them work for larger firms that tend to have well-run, low-cost plans that keep more money in the pockets of savers.
In my Reuters column this week, I consider the improvements that have benefited 401(k) savers, and the changes we still need if the system is benefit a wider group of retirees.
Living together: The wealth of generations
My friend Chris Farrell produced a terrific series on multigenerational living for MarketPlace radio that’s worth a listen. The series includes profiles of families choosing to live in multi-generational households, and a piece on college students living in an intergenerational co-living center.
Chris has been following for some time now the trend toward increasing numbers of people living in multigenerational homes and, in smaller numbers, living in deliberately designed intergenerational communities.
“The scale and scope of the trend seemed under-appreciated and too much of the coverage had a negative slant, like why can’t kids leave the house, boomerang kids in the basement, and so on,” he says. “The economics of living together are compelling. So are the caregiving benefits, whether its older adults taking care of their grandchildren, adults helping out their parents, or both.
What surprised Chris most in producing the series? “How much high and rising home prices have impacted the trend toward multigenerational living since the early 2000s. All signs point toward the trend toward living together either in a home or intergenerational community continuing in the years ahead.”
What does retirement really mean? Answers from 1,500 retirees
The New York Times asked readers to submit their stories about retirement - their experiences and advice - and received nearl 1,500 responses. The responses make it clear that retirement is not just one thing. Here are retirement lessons that Times editors selected for a feature story.
A success story, for now: Far more people have health insurance
Has any recent legislation provoked more fighting and controversy than the Affordable Care Act? More than a decade later - the ACA stands as a success story - and it serves as a reminder that policy can take some time to have an impact.
That was my reaction to recent news that uninsured rates plunged among Black, Hispanic, Asian and Native Americans plunged between 2010 and 2022 as the ACA took effect:
The uninsured rate among Black Americans dropped to just under 11 percent from roughly 21 percent, while the rate among Hispanic Americans dropped even more, to 18 percent from almost 33 percent. Among Asian Americans, the rate fell to just over 6 percent from nearly 17 percent, and among Native Americans to roughly 20 percent from more than 32 percent.
Unfortunately, the uninsured rate probably will start rising again soon. The higher subsidies for policies that were put in place during the pandemic expire after 2025. And, the pandemic-era expansion of Medicaid expired last year.
A cogent explanation of Social Security’s WEP/GPO feature
Some public-sector workers are in for a rude awakening when they retire: their Social Security benefits will be cut substantially compared with the projections provided over the years by the Social Security Administration.
These are the workers who are impacted by the WEP—the Windfall Elim- ination Provision. This is a little-understood Social Security rule that, along with its cousin, the Government Pension Offset, can mean very sharp benefit reductions for workers who participate in public-sector pension plans.
The WEP and GPO were enacted as part of broader Social Security reforms enacted in 1983 to avert a solvency crisis. The intention was to eliminate an advantage in the Social Security benefit formula enjoyed by people who also had pensions from jobs that are not covered by Social Security. But the logic is inscrutable to all but policy analysts and actuaries, and it produces quite a bit of understandable anger among people who are affected.
If you’d like to understand the policy thinking behind WEP/GPO - and read an argument as to why it makes sense, here’s an article by two experts - Richard Johnson and Karen Smith of the Urban Institute:
Despite their seeming unfairness, the benefit reductions prevent Social Security from overpaying well-off government retirees. Eliminating these reductions would worsen inequities, disproportionately benefit higher-income people, and exacerbate Social Security’s financial shortfalls. Plus, there are more targeted ways of increasing benefits for low-income beneficiaries.
Anticipating angry email messages from people who have been hit by this strange feature of Social Security, let me be clear: I don’t have a dog in this fight. The arguments made by Johnson and Smith are persuasive, but the WEP and GPO are political losers not worth fighting over. My suspicion is that WEP and GPO will be modified or eliminated as part of some future Social Security reform legislative package…. if that ever does happen.
What I’m reading
How an online scam cost a senior everything he had . . . The COVID retirement wave may be here to stay . . .Everything Americans think about the economy is wrong . . . Increasingly, help from mom and dad needed to buy a house . . . High earners get nearly half of the dollars employers contribute to retirement plans . . .Just say no when companies ask for your Social Security number . . . The experiences of older adults vary widely . . . Americans have more investment income than ever before . . . Big insurers and private equity firms gobble up in-home care providers . . . Personal conflicts and violence are not uncommon in long-term care residences . . .The summer’s breakout star is a 94-year-old actress . . . . Medicare Advantage plans will benefit from recalculated quality bonus payments . . .When caring for your parents comes at a cost to your career . . . Life coaching drained their savings in a pyramid scheme . . . These hot ETF funds are “boomer candy” for retirees . . . What retirement looks like when real estate is your 401(k).