PSNC 2013: 401(k)s Under Attack: I Don’t Get It!

The 401(k) industry continues to undergo scrutiny and criticisms—many of which are unfounded.

According to Joe Ready, EVP and director at Wells Fargo Institutional Retirement and Trust, plan sponsors and providers are spending billions of dollars educating America about how to prepare for retirement, and plan sponsors contribute 35% to 36% to participants’ balances, so why is the industry under attack? He told attendees of the PLANSPONSOR National Conference that the industry is sometimes its own worst enemy, reporting about the wrong averages.  

For example, 401(k)s are not only a benefit for the highly paid—80% of participants earn less than $100,000 and 40% earn less than $50,000. “We need to emphasize in conversations that 401(k)s benefit the middle class,” Ready said.  

According to Ready, a look at the Wells Fargo book of business shows the average 401(k) distribution is $125,000, which could generate $650 per month in income for life in addition to a $1,165 monthly Social Security payment. He noted that when we consider that for participants turning 65 now, the 401(k) was introduced as a supplement to retirement savings, so the Wells Fargo data shows it has served its purpose for those participants. Now the game has changed, and 401(k)s are a primary savings vehicle, he added.

Ready also pointed out that we hear the average deferral rate for participants who were automatically enrolled is 4.3%, but industry data shows the average deferral rate for participants who are not automatically enrolled is 6.9%. Ready said this shows that employees for whom plan sponsors are not making decisions  have gotten the message that they need to save, and at higher rates.

We also hear the average 401(k) balance is $76,000, but industry data shows that for participants in their 50s and 60s, the average balance is in excess of $200,000. And regarding the statistic that only 50% of workers have access to a retirement plan—Ready said this includes seasonal and part-time employees. When only full-time workers are considered, 80% have access to plans.  

Of course, there are still things the industry needs to work on, Ready noted—increased diversification of participant investments, decreased number of loans and withdrawals and an increased auto-enrollment deferral percent. But, he concluded, “Although there is still work to be done, we are making a difference in the quality of life people will have in retirement.”