The 401(k) is now the most popular type of retirement plan, with many employers providing a company match when workers deposit money into their accounts. But those benefits, often abbreviated as your company's “free money,” may be exacerbating inequality in retirement, according to new research.
About 44 percent of employer matches go to the top 20 percent of earners, according to a May study by researchers at Vanguard, Yale University and the Massachusetts Institute of Technology. In contrast, the bottom 20 percent of workers receive only 6 percent of matching contributions from their employers, according to the analysis.
There's a lot of money at stake, with corporations contributing about $212 billion in matching contributions by 2021, or nearly 60 cents for every dollar saved by workers, the study noted. But most of those employer dollars are more likely to go to higher-income workers, even though companies often tout their 401(k) matches as a way to entice all workers, regardless of income, to save for retirement.
“Entrepreneurial contributions are a ripe target for innovation,” the authors wrote in the report. “They accrue disproportionately to those with higher incomes, white workers, those with more access to liquid wealth, and those with wealthier parents.”
The findings come amid growing scrutiny of the pitfalls of 401(k)s, which now serve as the predominant retirement vehicle for American workers. About half of private employees participate in a so-called defined contribution plan, which includes 401(k)s and 403(b)s, compared to about 15% who have access to traditional pensions.
But while they have supplanted traditional pensions, 401(k)s have left most American workers behind, according to Teresa Ghilarducci, a labor economist and professor at The New School for Social Research in New York. First, many workers don't have access to them, and second, those who participate in 401(k)s are largely on their own to figure out how to invest and manage them, creating what Ghilarducci calls a “fragile” DIY system.
After more than four decades of a 401(k) system, nearly 3 in 10 older workers are nearing retirement without a penny saved Two-thirds of the youngest baby boomers doesn't have enough saved for their golden years.
Who saves and why
Of course, it's not entirely surprising that higher-earning workers receive a larger share of a company's matching contributions. For example, take two workers who direct 10% of their paychecks to their 401(k)s, with the first earning $100,000 and the second earning $50,000.
Under a typical percentage match, where an employer matches 50% of an employee's contributions up to 6% of their salary, the worker earning $100,000 would get a $3,000 match; for the employee earning $50,000, the match would be $1,500.
But the analysis found that higher-earning workers actually receive a larger share of employer contributions than their share of earnings, indicating that higher-earning employees enjoy huge benefits compared to co-workers with lower incomes.
In fact, the top 20% of workers get an 11% larger share of employer contributions than earnings, while the bottom 20% get a 29% smaller share of matching dollars than income, according to the study.
That's partly because some wealthier workers are more likely to max out their savings, which helps them get the most out of their employers' “free money.” But these people are also likely to have other advantages, such as family wealth or University degreethe study noted.
At the same time, the analysis found that there is not much evidence that company matches persuade workers to save more. Most low-income workers are not participating in their 401(k) plans despite their company's match, while most high-income workers are saving above the company's matching limit despite that they may not benefit from additional 'free money,'” the study found.
In other words, 401(k)s are giving more of an advantage to wealthier people who can afford to save more and maximize their company's bottom line, while disadvantaging people who can't afford to save as much. a previous event. analysis by MIT researchers found. The bottom line is that wealth inequality is likely to persist, they concluded.
There is one type of 401(k) match that offers a fairer distribution of company dollars, according to recent analysis. This type of program is called a dollar limit match, which is used in only 4% of 401(k) plans. These programs limit employer contributions to a dollar amount, such as capping a match at $6,000 a year, regardless of how much an employee earns or contributes.
And employers could add other attributes to help lower-income workers, such as immediate vesting, automatic enrollment and a higher default savings rate, the researchers noted.
