The Future of 401(k) Retirement Savings Plans
What You Need To Know
The pandemic highlighted the financial fragility of many American households — and the importance of workplace retirement savings plans like 401(k)s as the main way many workers can try to ensure a comfortable retirement.
Now, financial services firms are advocating for emergency savings options to become a more-routine feature within 401(k)s and other defined contribution plans. They are also shifting some of the focus from how to build savings to how to manage that money so it will last a lifetime.
Innovations such as automatic enrollment — where a worker must opt out of putting money aside rather than needing to opt in — and automatic escalation — where worker’s contributions increase each year — have nudged many people closer to the 12% to 15% of their salary that many financial planners say is the minimum people should ideally try to save annually.
In the future, along with offering more older workers the ability to direct some of their savings into products that promise a guaranteed income later in life, financial services firms administering workplace retirement plans want to offer participants more personalized financial planning.
Key Coverage
By The Numbers
- 51% Americans who say Covid made them more concerned about retirement finances, according to the National Institute on Retirement Security
- $9.9 trillion Held in defined contribution plans at the close of the first quarter of 2021, according to the Investment Company Institute.
- 60% U.S. households who don't think they've saved enough for retirement, according to Schroders
Why It Matters
Small changes made early in a retirement savings plan can have a big impact later in life, and with the retirement crisis in America worsening as a result of the pandemic, getting more workers into retirement plans — and helping them save — is more important than ever, financial advisers say.
The Securing a Strong Retirement Act of 2021, which is widely expected to be passed by Congress, aims to encourage more employers to offer defined-contribution plans like 401(k)s and 403(b)s and allow people to save more.
One aspect would be especially welcome to younger workers, or anyone struggling to save because of student loan debt: Companies could match payments that workers make on some student loans with contributions into a retirement savings account.
Small employers would have more incentives to offer defined-contribution plans. Part-time workers would be eligible to participate in two years, instead of three, in certain instances.
People could put in more money later in life. Currently, people over 50 can contribute an additional $6,500 on top of the usual annual maximum, which is at $19,500 in 2021.
If Congress acts, the changes will likely lead to more 401(k) plans offering older employees the option to direct some of their salary contributions into purchasing annuities in order to lock in an income stream later in life.
The inherent extra return participants enjoyed for many years has almost disappeared because of changes in tax laws and high fees.
