Why the "Monster" 401(k) Is Wrecking Retirement Security

Three decades into the era of the 401(k), millions of workers struggle to make the most of this savings plan—and its inventor fears he created a “monster.” Is it any wonder that, according to new research, only 32% of workers in the U.S. believe they are on course for a secure retirement?

Designed by benefits consultant Ted Benna in 1980, the 401(k) was supposed to supplement traditional pensions and other savings. But it quickly became the dominant retirement funding vehicle for working Americans, who have $3 trillion in these plans. Benna has said the plans are so complicated and fee laden he’d like to blow up the system and start over.

That’s not going to happen, and the good news is that 401(k) plans, especially the larger ones, have significantly lowered their fees. They have also minimized investing mistakes and simplified choices through features like automatic enrollment and escalation of contributions, and defaulting workers into target-date mutual funds. Workers have found these features appealing, which has helped to boost savings rates.

But these plan improvements are relatively recent and have done little to put older workers on a sound savings track. Even with the improvements, leading researchers including Teresa Ghilarducci at the New School Schwartz Center for Economic Policy Analysis and Alicia Munnell at the Center for Retirement Research at Boston College have called for new and simpler mandatory savings accounts.

Workers have other ideas. About one out of three workers in the U.S. believe government should increase funding for Social Security, according to a new report from the Transamerica Center for Retirement Studies. (The survey, which was conducted globally, found overseas workers wanted a similar expansion of government funding.) Workers expect nearly half their retirement income to come from such programs—even though those benefits have been eroding for years, and a reversal anytime soon is unlikely.

One way to improve retirement security is to encourage working longer. But this notion faces plenty of opposition. Only a third of workers in the U.S. favor raising the eligibility age for retirement benefits. Government efforts to encourage working longer continue to lag. Social Security full retirement age is slowly moving from 65 to 67. Meanwhile, the earliest age for claiming Social Security benefits still stands at 62. Benefits increase if you wait, but they max out at age 70. This is outdated thinking in an era of increasing longevity—life spans have grown by 30 years since the 1900s.

Employers also need to rethink their retirement policies. In the U.S., 65% of workers say a phased retirement that lets them extend their working years is an important benefit. But only 32% say such a program is available to them, according to the TCRS report. Globally, the numbers are even lower on both counts.

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Frustration with 401(k) plans is only part of the retirement security problem. Individuals receive painfully little financial education through their life and as result many rely on low-return savings accounts and fail to develop a saving strategy. Incredibly, about 10% or fewer of employers make available basic online retirement planning tools, even though two-thirds of workers with such access say the tools are helpful, according to the report.

It helps to have a financial plan. Some 75% of those with a strategy are habitual savers, vs. just 18% of those without a strategy, according to the report. And saving is really what it’s all about. Despite the misgivings of its creator, the 401(k) remains the best option for many. If you don’t have one you can find similar tax advantages in a Roth or traditional IRA. Making saving a habit—or making it automatic—is the best way to get comfortable with your financial future.