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Guest Article
(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

The Growing Importance of 401(k) Plans for Retirement Security: Up to the Challenge?

by Martha Priddy Patterson

Summary: The 401(k) plan is carrying increasing amounts of the retirement savings weight, according to recent reports. The question remains to be answered, are these retirement plans capable on their own of providing the retirement security participants count on?

A total of 64 percent of families with an employer-provided retirement plan were covered by a 401(k)-type plan in 1998. That number doubled in the six years between 1992 and 1998, according to the Federal Reserve Board's Survey of Consumer Finances. Just under one-third of those with a 401(k)-type plan (either a 401(k) plan or its nonprofit version, the 403(b) plan) also had a defined benefit plan, but this percentage is down sharply. In 1992, 38 percent of 401(k) participants also had a defined benefit plan. Looking just at families headed by someone under age 65 and with a current worker, the numbers are about the same. In 1998, 401(k) plans covered 65 percent of those families, up from 40 percent in 1992. The data, analyzed by the Employee Benefits Research Institute (EBRI) in a recent issue brief, offer employers a benchmarking tool based on the U.S. population as a whole.

Employers also can use these data to gain some valuable insight regarding employees' savings in IRAs and how those savings compare with savings in employer plans. Sponsors of 401(k) plans and retirement plan designers frequently stress the importance of employees' personal saving for retirement, but there is little ability to gather data on this type of saving through the workplace. As a result, the EBRI analysis of the Survey of Consumer Finances is an especially useful source of information on private retirement savings.

The mix of retirement plans changed dramatically from 1992 to 1998. In 1992, 38 percent of families with retirement plans had only a defined contribution plan, such as a 401(k) or 403(b) plan; 23 percent had both a defined contribution plan and a defined benefit plan. By 1998, the percentage of families with only a defined contribution plan had risen to 57 percent, and 22 percent of families had both types of plans.

Participation among those eligible for a 401(k) plan is also increasing. In 1995, 74 percent of eligible families participated in 401(k) plans; by 1998 just over 77 percent were participating. Part of the increase in 401(k)-type plan participation may be due to the fact that so many more families have access only to this kind of plan. Those families may understand the necessity of participating in the 401(k)-type plan because their employer offers no other plan.

Dramatic Difference Between Average and Median Balances

Predictably, both IRA and 401(k)-type plans show average and median balances increasing with income and with age. (See Tables 1-4).

Table 1
Average 1998 Account Balances - By Age

Savings VehicleUnder 3535-4445-5455-64Total
Past 401(k)15,90031,90092,10087,90057,700
Present 401(k)20,80043,80069,500104,10053,600

Source: Employee Benefit Research Institute, EBRI Issue Brief No. 223, July 2000, Table 8B. Based the Federal Reserve Board Survey of Consumer Finances.

Table 2
Average 1998 Account Balances - By Family Income

Less Than
Over $100,000
Past Employer 401(k)NA25,60032,20049,800167,400
Present Employer 401(k)2,40013,70019,90052,400160,300

Source: Employee Benefit Research Institute, EBRI Issue Brief No. 223,July 2000, Table 8B. Based the Federal Reserve Board Survey of Consumer Finances.

The average account balances show relatively high numbers. However, these numbers reflect the limited value of using averages. The average balance amounts are relatively skewed by the fact that a few individuals have many very large balances. Looking at the median balances - the amount at which half the participants have lower balances and half have higher balances - may offer a more realistic picture of retirement savings.

In 1998 the median balance of families holding any 401(k)-type plan is $15,000. For those families that are participating in only a 401(k)-type plan, the median 401(k) balance value drops to $12,000. If the family has both a defined benefit plan and a defined contribution plan (usually a 401(k) plan), the median 401(k) balance is $25,000, a significantly higher amount.

The irony here is clear - the more likely it is that a family has a 401(k) plan as its only employer-provided benefit, the lower that 401(k) account balance is likely to be! This is true at nearly all age, income and net worth percentiles, as shown in Tables 3 and 4.

Table 3
Median 1998 Account Balances - By Age

Plan TypeUnder 3535-4445-5455-64Total
401(k)-Type Plan$5,000$16,000$27,000$28,050$15,000
401(k) & Defined Benefit Plan7,00021,00030,00040,00025,000
401(k) Only4,50015,00025,00022,00012,000

Source: Employee Benefit Research Institute, EBRI Issue Brief No. 223, July 2000, Table 6. Based the Federal Reserve Board Survey of Consumer Finances.

Table 4
Median 1998 Account Balances - By Family Income

Plan TypeLess Than
Over $100,000
401(k)-Type Plan$1,300$2,000$8,000$25,000$70,000
401(k) & Defined Benefit PlanNA1,10010,00026,00075,000
401(k) Only1,4002,0007,50022,00068,000

Source: Employee Benefit Research Institute, EBRI Issue Brief No. 223, July 2000, Table 6. Based the Federal Reserve Board Survey of Consumer Finances.

What Will the 401(k) Retirement Benefit Be?

The median 401(k) plan balance reported by plan participants with only 401(k) plan coverage who are nearest retirement - aged 55 to 64 - is $22,000. Using an optimistic assumption of a steady average 10-percent rate of return and a retirement period of 20 years, this account balance will give an annual income of just under $2,600 per year.

The rise of 401(k) plans should mean that future account balances for retirees will be larger. But these existing numbers, which do show ever-increasing account balances over the years, also show that employees will need encouragement and financial education to help them develop 401(k) balances that can provide significant retirement income. Clearly 401(k) plans have the potential to pay retirees a significant annual income over the course of their retirement. Even a deferral of $1,000 per year for 30 years with a 7-percent annual return can provide an annual retirement income of $8,800 for 25 years; at 10 percent it can provide $15,000 annually. Neither of these amounts will provide a lavish retirement, but they illustrate the potential of regular and early 401(k) plan participation.

The real key to making 401(k) plans a viable retirement benefit option that creates sufficient income for employees throughout retirement is both to maintain participation levels and to increase employees' ability to maximize the plan by their prudent and appropriate investments. Neither employers or employees have a "magic wand" to accomplish these goals, but fortunately there are some very good tools to build toward these goals, some of which are cost-free to the employer.

Automatic enrollment is a major tool for building a sound 401(k) plan. Employee financial education is another. Dozens of free or low-cost retirement planning calculators are available. The free "Ballpark Estimate" offered by the American Savings Education Council (ASEC), in print and on the Web ( is one such tool. Local land-grant and community colleges will work with employers to offer financial education to employees. Other calculators and courses are available on the Internet, most of them for free. By at least informing employees about these sources, employers can give plan participants a push toward financial education.

Perhaps employers can justifiably argue that they should not be responsible for basic financial education for employees. But if employees are to make the most of the 401(k) plans employers are offering, the education probably will have to be encouraged, if not provided, by the employer.

Martha Priddy Patterson is director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.
Reprinted with permission from the September 2000 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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