WASHINGTON — Younger workers can count on 401(k) plans to replace just a modest percentage of their income when they retire in the middle of this century, according to a study that highlights the need for changes in the nation's pension system, members of Congress said recently.
Overall, just 36 percent of workers had savings in 401(k) or similar retirement plans in 2004, with participation practically disappearing among the lowest-paid workers, the Government Accountability Office reported. For those who had such retirement savings, the typical account balance was $22,800, the study found.
Policymakers increasingly are focusing on the adequacy of 401(k) and similar savings plans because they have become more common than traditional pensions, which guarantee set monthly payments in retirement.
"Unless we act now, too many workers just starting their careers today will unfortunately face a less secure retirement than did many of their parents," Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, said in a statement. "Today's workers will more likely struggle to make ends meet during retirement than previous generations."
Plans should be changed to enroll workers immediately, attract more low-income employees and limit the "leakage" of assets when workers change jobs and spend their nest eggs rather than reinvest them in new accounts, Miller said.
Advocates of 401(k) plans say they can amply reward those who save diligently for a period of years. Enthusiasts also maintain that such plans are suited to the modern economy in which people change jobs frequently.
Critics, however, say 401(k) plans have provided insufficient protection for many workers.
The study was based on a Federal Reserve survey of consumer finances, using 2004 data. Among the weaknesses it highlighted:
- Low-income workers are largely left out of the 401(k) system. Although 36 percent of people overall participated in such retirement plans, that figure plunged to 8 percent for those in the bottom 25 percent of the income ladder.
- Savings levels often are not sufficient to finance retirement. The typical account balance rises to $50,000 for workers between 55 and 64. But a 65-year-old who bought an annuity with this amount could get just $4,400 a year in income, researchers said.
- Account balances often are reduced by pre-retirement spending. Of the 21 percent of plan participants who had gotten lump-sum distributions from a former employer, 47 percent cashed out completely and 4 percent spent part of the money. Ending such leakage could push up retirement income by about 11 percent, according to the study.
Speaking with reporters, Miller and Rep. Robert E. Andrews, D-N.J., suggested various ways to strengthen the system, including setting up plans in which workers would participate instantly rather than wait through eligibility periods and more reliably having assets rolled into new retirement accounts when people change jobs.
The GAO report also outlined other possible actions to boost savings, including an automatic IRA, in which employers make payroll contributions to retirement accounts, and expanded tax credits for saving. It also noted that several states are exploring the idea of setting up low-cost retirement savings plans that states would make available to employers that do not sponsor plans.
"The bad news is that unless patterns change, this is very bad news for tens of millions of people," said Andrews, who is chairman of the House pensions subcommittee. "The good news is that we have time to do something about it."
The study found that, under current trends, 401(k) and similar plans will be able to replace an average of 22 percent of the income of workers who retire in the middle of this century. That figure is far below the 70 percent to 80 percent often recommended by financial planners for a comfortable standard of living in retirement.
But it left out Social Security benefits, which will amount to an additional 30 percent to 40 percent of pre-retirement income for many workers, according to the Center for Retirement Research at Boston College.
"There's no reason you can't do as well with a 401(k) plan as with a traditional pension plan. But when you look at actual human behavior," it often does not turn out that way, said Andrew Eschtruth, communications director for the Center for Retirement Research.
A spokesman for the 401(k) industry said Tuesday that employers were responding to tax and regulatory changes made in 2006 that have set the stage for the retirement savings plans to become more effective in coming years.
These changes include making permanent a saver's credit that will benefit lower-income workers and a measure that will encourage low-wage people to keep modest asset amounts in retirement accounts when they change jobs rather than spend the money.