Since the recession began, 401(k)s have been deemed a failure, with the stock market's plunge calling into question the effectiveness of the long-revered retirement savings vehicle.
One recent study, however, is directly disputing that argument. The 11th Annual Transamerica Retirement Study shows that not only do 401(k) plans help Americans save for retirement, they also increase plan participants' knowledge regarding retirement saving.
In the study, which surveyed 3,598 full- and part-time for-profit workers between Dec. 3, 2009, and Jan. 18, 2010, 71% of respondents said they have access to a 401(k) or other employee-sponsored plan at work; of these, 77% currently contribute to the plan. They began saving at a median age of 28. Forty-one percent have saved more than $50,000 for retirement so far, with 29% having saved more than $100,000.
Nearly 30% of survey participants, meanwhile, said they were not offered a plan at work; of those, only 22% have saved more than $50,000 for retirement and just 16% have saved more than $100,000. The median age to begin saving for retirement for this group was 30. Nearly half of private-sector workers — or roughly 54 million workers — do not currently have access to a retirement plan at work, according to the Transamerica Center for Retirement Research.
"If [401(k)s are] drawing a 77% participation rate, there's something right going on here," said Catherine Collinson, the president of the center.
Having an employee-sponsored retirement plan benefits Americans in other ways. According to the report, for example, 66% of those with access to a plan also save for retirement outside of the plan, compared with 57% of those without access to a plan.
Those with access to a plan are also more likely to have a retirement planning strategy — 61% of workers with a plan, compared with 40% of those without one. There is room for improvement in both categories however, Collinson insists, since nearly no participants (9% of those with a plan, 5% of those without a plan) have actually written the plan down somewhere. Of even more concern, 39% of those with a plan and 60% of those without one have no retirement strategy at all.
Participants in 401(k) plans are clearly more educated about retirement, as well. Workers without a plan are more than twice as likely as workers with a plan to state "not sure" when asked how their retirement savings are invested. Those with a plan, meanwhile, are more likely to be currently managing and monitoring their accounts and actively thinking about saving for retirement.
They're more knowledgeable, too. According to the study, education regarding asset allocation principles, catch-up contributions and the saver's credit rises with an individual's plan participation rate. Plan participants are even more realistic — both about the amount they will need to live comfortably in retirement and the age they will retire at.
But even with all this success, Collinson admits that America has a long way to go in its preparedness for retirement.
For instance, those with a plan estimated they will need a median of $800,000 to live comfortably in retirement, compared with the $500,000 those without a plan estimated. While $800,000 is certainly a more realistic number, Collinson points out that most Americans will need far more than either of these amounts. The report did not break these estimates out by household income, a factor that is sure to affect the numbers as those with higher incomes will likely estimate needing more.
"In the last couple of years, clearly the risks of 401(k) investing were revealed," Collinson said. "I wouldn't call 401(k) plans a failure, but I think we've learned there's still opportunity for improvement in enhancing 401(k) plans as well as the participation rates. Part of it is education and gaining a better understanding of asset allocation and risk profiles and fee disclosure and workers' understanding of fees.
"Since fee disclosure became a very hot topic a few years ago, the industry has moved aggressively — even without new regulation — to do a much better job to disclose fees. However, regardless, awareness still remains very low among workers. It's important for workers if they're not aware of the fees being charged to their account that they ask so they can make informed decisions."