Not only is the typical 401(k) a lousy way for most people to save for retirement, it is also making wealth inequality worse, according to a new study.
You're probably aware that in recent decades 401(k) plans have risen to replace pension plans as the first line of retirement savings for millions of Americans. But most of the benefit of these plans, such as it is, has accrued to the wealthiest Americans, argues the Economic Policy Institute, a left-leaning think tank, using an armada of charts.
That means the poorest Americans are increasingly left to rely on Social Security as their primary source of retirement income at a time when many in Washington are trying to squeeze Social Security benefits.
"The existence of retirement system that does not work for most workers underscores the importance of preserving and strengthening Social Security, defending defined-benefit pensions for workers who have them, and seeking solutions for those who do not," the EPI economists wrote.
First, here is the EPI's look at the steady decline of traditional "defined-benefit" pension plans, charted against the rise of "defined-contribution" 401(k) plans:
One huge problem with 401(k) plans is that they can lose value abruptly when the market collapses, which has happened twice in the past 14 years. Even in good times, though, these plans often trail the broader market, in part because of all of the often hidden fees that steadily drain your retirement savings.
Still, they're not a terrible way to shelter some of your savings against taxation, which makes them ideal for wealthier Americans. And wealthier Americans are more likely to have such plans, anyway, the EPI notes: Unlike poor Americans, the wealthy are more likely to have the spare income to shovel into 401(k)s, and wealthier Americans are more likely to work for employers that are willing to match those contributions.
So along with the rise in 401(k) plans there has been a dramatic rise in the inequality of retirement savings, as this EPI chart shows:
As you can see from the chart, the wealthiest Americans have 100 times the retirement savings of the poorest Americans, who have, basically, no savings.
That means a happy-looking chart, like this one, showing a big rise in total retirement savings:
... is good news mainly for households with 401(k) plans. That group typically does not include African-Americans or Hispanics:
That means minority households have almost nothing saved for retirement:
And you're also out of luck if you don't have an increasingly expensive college degree:
Or if you're single:
So we shouldn't be fooled by charts like this one, which shows retirement savings outpacing income:
Most workers are still woefully unprepared for retirement and will need all the help they can get.