The Congressional Research Service has issued a new report, 401(k) Plans and Retirement Savings: Issues for Congress, that describes seven major policy issues facing defined contribution plans:
1. Access to employer-sponsored retirement plans. In 2007, only 61 percent of employees in the private sector were offered a retirement plan of any kind at work. Fifty-five percent were offered a defined-contribution plan, such as a 401(k). Only 45 percent of workers at establishments with fewer than 100 employees were offered a retirement plan of any kind in 2007. Forty-two percent were offered a defined-contribution plan.
2. Participation in employer-sponsored plans. Between 20 and 25 percent of workers whose employer offers a DC plan do not participate. Workers under age 35 are less likely than older workers to participate.
3. Contribution rates. On average, participants in DC plans contributed 6 percent of pay to the plan in 2007. The median contribution by household heads who participated in a DC plan in 2007 was $3,360. This was just 22 percent of the maximum allowable contribution of $15,500 in that year.
4. Investment choices. At year-end 2007, 78 percent of all DC plan assets were invested in stocks and stock mutual funds. This ratio varied little by age, indicating that many workers nearing retirement were heavily invested in stocks and risked substantial losses in a market downturn like that in 2008. Investment education and target date funds could help workers make better investment decisions.
5. Fee disclosure. Retirement plans contract with service providers to provide investment management, record-keeping, and other services. There can be many service providers, each charging a fee that is ultimately paid by participants in 401(k) plans. The arrangements through which service providers are compensated can be very complicated and fees are often not clearly disclosed.
6. Leakage from retirement savings. Pre-retirement withdrawals from retirement accounts are sometimes called leakages. Current law represents a compromise between limiting leakages from retirement accounts and allowing people to have access to their retirement funds in times of great need. In general, borrowing from a 401(k) plan poses less risk to retirement security than a withdrawal. Pre-retirement withdrawals can have adverse long-term effects on retirement income.
7. Converting retirement savings into income. Retirees face many financial risks, including living longer than they expected, investment losses, inflation, and possible large expenses for medical care and long-term care. Annuities can protect retirees from some of these risks, but few retirees purchase them. Developing policies that motivate retirees to convert assets into a reliable source of income will be a continuing challenge for Congress and other policymakers.
The Financial Services Roundtable, an industry-lobbying group, said it supports strengthening retirement savings in all seven areas. The group also offered several other recommendations for strengthening retirement security. For example, to reduce leakage of retirement savings, the FSR recommends allowing employers to automatically enroll employees that leave the company into an IRA if the employees balance is below $10,000. Other recommendations include using tax incentives for small businesses to create auto-enrollment plans, and allowing employers to set an employees initial contribution rate to their retirement plan at 3 percent or higher.
