The 401(k) is no longer a wealth driver for the middle class
401(k) plans are not cutting it for low-income and middle-income Americans and that’s a problem.
Approximately only one in 10 low-income U.S. households had a retirement account balance in 2019—opposed to one in five in 2007.
Compare that to nine in 10 high-income Americans who had a retirement account balance every year from 2007 to 2019 according to the U.S. Government Accountability Office (GAO).
Meanwhile, 401(k) balances—often promoted as a key wealth driver for the middle class—showed no growth over the past decade for middle- and lower-income groups.
Simultaneously, the top 20% of U.S. earners saw their retirement nest eggs double over the same period, the GAO reported.
There are three primary reasons low-income and middle-income American workers aren’t getting any juice from a 401(k) plan, according to the Center for Retirement Research at Boston College.
The worker’s employer does not offer a plan, the worker’s employer does offer a plan but the worker is not included, or the worker is self-employed.
“The first group accounts for three-quarters of all uncovered workers. Initiatives to close the coverage gap generally focus on expanding coverage to the first group, but some also aim to eventually include the other groups,” the CRRBC stated.
Uncle Sam is highly aware of its 401(k) problem but the measures undertaken to curb the negative impact of 401(k) and IRA plans largely haven’t worked.
A huge reason for that scenario is the initiatives have depended on employees volunteering for such plans. And that hasn’t happened in large enough numbers to make a difference.
Would mandated retirement plans work?
To try to level the playing field, the federal government and a rising number of U.S. states have taken aggressive steps to mandate employer-sponsored retirement plans.
The main driver has been the Consolidated Appropriations Act of 2023 (HR 2617), signed into law on December 29, 2022.
Under the Act’s so-called SECURE 2.0 provision, employers will operate under more stringent conditions to ensure staffers have access to retirement plans.
Secure 2.0 will call for automatic enrollment and automatic escalation in U.S. company-sponsored retirement plans starting in 2025. Companies that roll out new retirement plans will have to automatically enroll employees in their retirement plan at a rate of at least 3% annually.
In addition, new company retirement contribution percentages must increase by 1% on the first day of each plan year following completion of a year of service until the contribution is at least 10%. but no more than 15% of total wages.
Companies with 10 or fewer employees, and businesses three years old or newer are excluded from those mandates.
Fifteen U.S. states are either planning, establishing, or have already established mandated retirement plans. Basically, the plans are state-sponsored and come in the form of an IRA and not a 401k plan.
SECURE 2.0—Too little too late?
While the SECURE 2.0 automatic mandates may boost 401(k) plan participation by 33%, according to GAO figures, that won’t significantly help lower-income employees.
That’s primarily because only 23% of U.S. lower-income career professionals have access to employer-sponsored retirement plans.
Similarly, any boost in 401(k) annual contribution limits would have little or no impact on low-income workers—because few of them come close to meeting the current $22,500 contribution limit.
“Increasing contribution limits for workplace retirement accounts almost entirely benefits high-income workers, as about 23% of high-income compared with 3% of middle-income older workers contribute the individual limit,” the GAO noted.