Having access to a 401(k) plan can greatly enhance a person’s ability to achieve a comfortable and financially secure retirement. For example, a survey conducted by Wells Fargo found that nearly nine in ten plan participants age 30 or older said that they believe they would likely not have been able to set as much money aside for retirement without the help of their 401(k). As for surveyed workers currently lacking access to these plans, 62 percent feel that they would probably be saving more if they could utilize a 401(k).
Participants in these tax-advantaged defined contribution plans, when compared to workers without access, were also found to be more likely to demonstrate constructive financial behaviors such as beginning saving for retirement at an earlier age (28 vs. 31), having higher savings goals (median $800,000 vs. $500,000), and making greater progress toward such goals (15 percent vs. 10 percent). Moreover, 401(k) participants were found to have saved significantly more for retirement than those without plan access (median $120,000 vs. $50,000). The difference in accumulated savings becomes more dramatic as people age. Workers in the sample age 50 or older with a 401(k), for instance, had set aside over six times more for retirement than those without plan access.
Unsurprisingly 401(k) participants were found to have greater certainty about when they will be able to retire than workers without access to these plans, as well as a lower likelihood of having to rely upon Social Security as a primary income source in old age. Another reason why 401(k) participants are typically better prepared for retirement than those without plan access is because employers sponsoring these savings vehicles will often match a portion of what workers contribute. Due to the economic disruptions caused by the coronavirus it would be understandable if employers stopped making these matching contributions, even if just temporarily, but a new report from the Plan Sponsor Council of America suggests that roughly 9 in 10 businesses made no changes to their matching policy this year.
A higher proportion of small businesses did reduce or suspend their contribution match, which is to be expected since this group has been more exposed to lockdowns and other activity restrictions used to stem the spread of COVID-19, but still only 11.5 percent of these firms made changes to plan contributions this year. The report’s authors added that “We often are asked how companies are responding to current economic conditions as compared to the financial crisis of 2008/2009. The short answer is that, over a somewhat longer time horizon, four times as many employers suspended or reduced the match than compared to now. Where their retirement plans are concerned, employers’ responses to current conditions seems more measured than in 08/09. We may be seeing the impact of lessons learned.”
Sources: Wells Fargo, PSCA, NAPA