By Alicia H. Munnell, Annika Sundén
As the infant growth starts to withdraw from the hard work strength, making sure a safe retirement source of revenue turns into an more and more vital factor, the variety of humans over age sixty five is anticipated to double by means of 2030. That pattern will proceed, followed via concerns approximately inventory industry volatility, company malfeasance, a speedily altering financial system, and the viability of Social safety. In bobbing up brief, specialists on retirement coverage study 401(k) plans, the fastest-growing kind of employer-sponsored pensions and a necessary resource of retirement source of revenue for the yank center classification. Alicia Munnell and Annika Sunden chronicle the improvement of 401(k) plans, now the dominant type of deepest pensions. In available language, they clarify how such plans paintings and speak about their reputation. for staff, those plans are beautiful becuase they've got extra keep watch over over their very own retirement cash, and the plans are transportable. For employers, the plans are regularly more cost-effective than outlined profit plans. regardless of these merits, there are a few major downsides to 401(k) plans. those plans shift all of the probability and accountability to staff, who needs to come to a decision no matter if to hitch, how a lot to give a contribution, tips to make investments, no matter if to "cash out" while altering jobs, and the way to regulate their nest egg in retirement. those are tough judgements, and whereas in conception 401(k)s will be a good discount rates car for retirement, in perform many of us make error at each step alongside the way in which. Com ing Up brief discusses why those error are made and proposes quite a few reforms to make sure that the getting older inhabitants may have enough retirement source of revenue. accomplished and up to date, arising brief is an important source on 401(k) plans for monetary provider execs, policymakers, teachers, and members making plans for his or her personal retirement.
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Additional resources for Coming Up Short: The Challenge of 401(K) Plans
32 This pattern implies that saving for retirement occurs only in the last fifteen years or so before retirement. The argument that people delay retirement plan contributions until their fifties, however, is not consistent with data from the Survey of Consumer Finances (SCF), which show a relatively constant contribution rate after age thirty and roughly the same percentage of eligible workers contributing in all age groups (table 2-4). 34 The question is whether they leave it in. Table 2-5 suggests that they do not.
41. Poterba, Venti, and Wise (2001), p. 51. 42. Authors’ calculations based on data from the Board of Governors, Flow of Funds (2003), and the Bureau of Economic Analysis (2002). Poterba, Venti, and Wise (2001) may exaggerate the growth in pension assets relative to wages and salary because of data problems and the bull market of the 1990s. The data problem is that asset figures before 1985, particularly for IRAs, are not accurate. The Federal Reserve has created a consistent series for defined benefit, defined contribution, and IRA assets from 1985 to the present.
This surge continued through the 1980s, after the emergence of 401(k) plans. The 1980s expansion produced 40 percent of the 401(k) plans in 1995, with 45 percent of the participants (table 2-1). The third factor in the shift to 401(k) coverage was a virtual halt in the formation of new defined benefit plans and a spike in terminations during the late 1980s. Terminations increased sharply in the late 1980s after the Tax Reform Act of 1986 placed restrictions on small defined benefit plans that benefited only highly paid individuals.