401(k)s Still an Experiment in the Making

By and large, 401(k) plans have been a success.


LAS VEGAS—While there is considerable room for improvement, 401(k) defined contribution plans have largely been a success. That was the consensus of speakers at the session, “Are 401(k) Plans a Failed Experiment,” at the National Association of Plan Advisors/Association of Pension Providers and Actuaries (NAPA/ASPPA) 401(k) Summit here Sunday.

However, with even the conservative Fox Business calling for the “retirement” of 401(k)s, the plans have come under attack, said Brian H. Graff, Chief Executive Officer of ASPPA.

Not all of the criticism is warranted, as 401(k) plans have helped many people prepare for retirement, said Kevin Crain, head of institutional and benefit services at Bank of America Merrill Lynch. Automatic enrollment, in particular, has been a boon for the plans, with 56% of employers using it, and 89% of employees automatically enrolled and staying enrolled, Crain said. “401(k) plans have not been a failure,” Crain said. Rather, it is important to focus on their “evolution in the past 10 years to a Democratic paternalism.”

That said, plans do need “more advanced use of automatic enrollment,” Crain said. “It is not enough to default enrollment at 1%. Also, enroll all eligible employees—not just new hires. Add automatic increases and other advancements, such as advice. People who use advice save $2,200 to $2,500 more a year, and if they start at a young age, they have a 30% more saved by retirement.”

Additionally, nearly all—97%— employees who are defaulted at contribution rates of 6% stick with the plan, Crain said. In fact, at Bank of America Merrill Lynch, there has been a 20% increase in the past year in sponsor clients that have combined automatic enrollment and automatic escalation, Crain said. And if plan sponsors express concern about the higher cost of participation, it is up to plan advisers to educate them that “higher auto default rates don’t have to result in higher match costs,” Crain said.


Perhaps the strongest characteristic of 401(k) plans is their ease of use, said Judy A. Miller, executive director and director of retirement policy at ASPPA. “They offer automatic payroll-deducted savings, employer matches, tax deductions, professional asset management and portability.”

“It’s the only way we have gotten middle class Americans to save,” added Brian H. Graff, chief executive of ASPAA.

In addition, even though policymakers don’t appreciate this fact, Crain said, 401(k) plans offer low costs and economies of scale, which are getting even lower because of the fee disclosure requirements of the past year. “Small and midsize plans invoke institutional buying power,” he said.

To strengthen 401(k) plans, however, Crain said that more imagination is needed. Plans that do not automatically enroll employees in their 401(k) plan should present the opportunity to their staff every year alongside the annual health care decision, Crain said. The government needs to preserve the tax benefits of qualified retirement savings accounts, he continued. Plan designs need to be simplified, and the Department of Labor (DOL) should limit sponsors’ fiduciary liability, “to encourage employers to continue to sponsor retirement savings plans,” he said.

There are additional problems with 401(k) plans, noted Karen Friedman, executive vice president and policy director at the Pension Rights Center. 401(k) plans were never designed as outright pensions, but as supplemental savings plans, Friedman said. Thus, to adequately prepare people for retirement, individuals would have to contribute very large amounts to the plans. And without automatic enrollment, automatic escalation and the use of well-diversified qualified default investment alternatives (QDIA), all the risk and decisions still fall on participants, she added.


“401(k)s are a gamble because they work for some people and not for others,” Friedman said. “Only 5% max out their contributions. Lifecycle funds are good—but they vary considerably and carry higher fees.”

That does not address the fact that millions of Americans do not even have the option of investing in a workplace retirement plan—and 20% of those that do take out loans or hardship withdrawals, or cash out of their plans rather than roll over the money when switching jobs, Friedman said. “The median 401(k) balance is $44,000 and $100,000 for people at retirement,” she said. “The reality is that a lot of people aren’t saving for retirement.”

“Then, even if you do everything right, you still have to make it last,” Friedman said. Retirement income solutions are not even on the table for 401(k) plans, she said. Sponsors and advisers could start with partial annuities, she suggested.

To strengthen 401(k) plans, the DOL and Congress should expand options for annuitization in the plan, Friedman said, and restrict pre-retirement access.

“The main problem is coverage and access,” Miller added. “Small companies and part-time employees don’t have access to a retirement plan, and with a changing workforce,” this is a critical issue, she said. Additionally, “deferral levels need to rise,” she said. “Automatic enrollment should be mandatory.” Simply put, Miller said, “people need to save more. And lifetime income is lacking.

One encouraging development on the legislative front is the idea of automatic individual retirement accounts (IRAs) for small employers with five or more employees, Graff said. Seven states—California, Connecticut, Illinois, Maryland, New York, Oregon and Washington—are considering some version of this, Graff said. “Expanding the availability of workplace savings through auto IRAs would set the stage for more employers to move up,” Miller said. And this would not “cannibalize 401(k)s,” Crain added.