401(k) Specialist Issue 1 - 2024 - 44

401(k) END NOTES
Facts Don't Back Recent Criticism of
Voluntary Retirement Plan Market
By Sean Collins
AMERICA'S VOLUNTARY RETIREMENT
plans are the envy of the world. Countries
like Japan, South Korea, and the U.K. are
trying to replicate the remarkable success
of 401(k) plans and individual retirement
accounts (IRAs), which have helped Americans
from all walks of life build financial
security and generational wealth.
Yet, it's become fashionable to question
the architecture of our retirement system,
particularly voluntary retirement plans.
Some critics advocate for tearing the entire
system down to the studs, ignoring its successes
and consistent improvements.
Some media outlets are also piling on
with misleading criticisms. For example, a
recent report by Mercer and the CFA Institute
assigned a " C+ " to the U.S. retirement
system-the same grade as Kazakhstan's-
which one newspaper interpreted as
indicating that " Social Security and 401(k)
plans leave Americans less secure than
retirees in much of the world. " While this
alarmism makes for splashy headlines, the
facts-even the ones in Mercer's report-
don't back up this assessment.
ICI economists found that, adjusted
for inflation, the typical American retiree
maintains more than 90% of their average
age 55-59 spendable income thanks to distributions
from retirement plans and Social
Security. Mercer and the CFA Institute seem
to agree with that finding, acknowledging
the U.S. has a high replacement rate of
pre-retirement income. The Mercer study
also gave the U.S. top marks for the tax
treatment of its retirement plans and retirement
assets relative to GDP. So why did
their overall report give the U.S. a C+?
Among other things, slower-than-average
economic growth and a high governmentdebt-to-GDP
ratio dragged down the overall
rating-probably not the issues most would
associate with a bad retirement grade. The
U.S. was also downgraded because workers
44
ISSUE 1 2024 | 401kSpecialist.com
ers introduced a bill that would establish a
defined contribution (DC) plan-similar to
the Thrift Savings Plan (TSP)-administered
by the federal government, with matching
contributions paid for by taxpayers, which
they estimate could cost a whopping $40
billion a year.
The bill is the latest attempt to extend the
" Criticizing a system
that is working for
so many people
means ignoring the
great strides our
country has made
to enable everyday
Americans to share
the successes of
capital markets and
retire comfortably. "
are not required to contribute to a retirement
plan or required to take part of their retirement
benefits as an annuity-apparently
ignoring the requirement that American
workers " contribute " payroll taxes into Social
Security, which just so happens to pay out
all benefits in the form of an annuity.
No retirement system is perfect, but the
misperception lingers among policymakers
that the voluntary component of the U.S.
system is fundamentally broken. Last October,
a group of House and Senate lawmakgovernment's
reach into the voluntary retirement
market, apparently on the belief that
U.S. workers lack access to retirement plans.
But research shows that's not the case.
ICI analysis of IRS data reveals that more
than 70% of retirees receive income from
employer-sponsored plans or IRAs, either
directly or through a spouse. That figure
climbs to 98% when Social Security income
is included.
Moreover, voluntary retirement plans
have progressed significantly over time.
Adjusted for inflation, retirement assets
per household are more than seven-times
greater than they were in 1975. And 91% of
401(k) participants were in plans with employer
contributions as of plan-year 2020.
There's always room for improvement in
the U.S. retirement system. For example, the
recently enacted SECURE 2.0 Act will help fill
the gaps in retirement coverage by easing future
workers' path to saving and incentivizing
small businesses to offer retirement plans.
Criticizing a system that is working for
so many people means ignoring the great
strides our country has made to enable
everyday Americans to share the successes
of capital markets and retire comfortably.
Policymakers should instead work together
with industry to strengthen the foundation
of the system with those people in mind.
Sean Collins is Chief Economist at the Investment
Company Institute. He oversees the Institute's
statistical collections and its research on U.S. and
global funds, financial markets, the U.S. retirement
market, and investor demographics.
http://www.401kSpecialist.com
401(k) Specialist Issue 1 - 2024

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