Why 401(k)s Haven't Ruined Everyone's Retirement After All

It's something of a matter of faith among retirement wonks that the shift from pension plans to 401(k)s has left millions of Americans saving too little, leaving them under-prepared for retirement.

Now one of the nation's leading retirement authorities says that conventional wisdom might be wrong. A study released this week by the Center for Retirement Research at Boston College used new data to examine how much Americans saved under the pension system a generation ago versus how much they are saving in today's defined contribution plans.

Measured simply in terms of regular contributions, the study found that Americans were indeed saving slightly less. The average American socks away less than 6% of their annual wages in anticipation of retirement today, down from more 7% in 1984, when pensions were common and many Americans accrued benefits automatically.

But when the researchers measured the broader rate at which workers have accumulated retirement wealth, including not only savings but also investment gains, the results held about steady—at roughly 13% of wages annually. One reason: Unlike 401(k)s, pensions cap would-be retirees' benefits, even if the pension funds' investments do great. That's allowed today's retirement plan savers, many of whom benefited from the '80s and '90s bull markets and the post-financial crisis rebound, to make up for lower contributions through outsized investment results.

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The surprising findings prompted the papers' authors, which include director Alicia Munnell, to drop the usually calibrated, jargon-lated writing of retirement research and confess: "We're going to have to change our story!" (Yes, the exclamation point was theirs.)

So not to worry? Well, not exactly.

The shift from our old pension-based retirement system to a new 401(k)-based system has left workers less well off in one important way: It's shifted investment risk from employers onto workers.

Think of it this way. While today's 401(k) savers are keeping up with pensioners in the long run, they did so essentially by betting big—and winning big. The study's results are heartening in the sense that today's savers have managed to stay on more or less equal footing with the previous generation. What's disheartening: The period researchers looked at includes one of the best in the stock market's history, and rather than pull ahead, retirement savers only managed to stay even.

"The results reflect the enormous stock market boom of the 1990s and the huge recovery since the financial crisis," says Munnell. "You can't count on those things happening again and without them it is a different story."

The upshot for older workers is that the 401(k) system has left them better prepared for retirement than some top experts thought. But younger workers still need to work harder saving to replace what was essentially provided guaranteed to many of their parents and grand-parents.