New Study on 401(k): Failed Experiment or Solid Plan?

by Joe Plemon on April 12, 2010

Where is going the stock market ?????
Creative Commons License photo credit: pfala

From its high in October 2007 through its low in March 2009, the S & P Index fell nearly 57%.  Many 401(k)s likewise plummeted drastically, forcing many to delay or scale back their retirements and bringing on the chorus of “failed experiment” in describing the 401(k) strategy.  But is it?

A recent Transamerica Retirement Study indicates that we shouldn’t put the 401(k) out to pasture quite yet.  What does the study teach us?

Greater participation

This study surveyed 3,598 full and part time for-profit workers between December 3, 2009 and January 18, 2010, discovering that 71% of the respondents had access to a 401(k) or other employee-sponsored plan at work, of which 77% contribute.  Forty-one percent have saved more than $50,000 toward retirement while 29% have topped $100,000.

How are the nearly 30% of the workers who are not offered a retirement plan at work doing?  Not as well.  Only 22% have saved more than $50,000 and only 16% have more than $100,000 put away.

Why the high participation?

Although the market had rebounded considerably by the time the survey was taken, I am nevertheless intrigued by the 77% participation rate on the heels of the recent dismal market performance.

Catherine Collinson, president of Transamerica Center for Retirement Research shares her thoughts, “The plans offer convenience of payroll deduction, a range of investment options that may not be available to them – especially new investors – because of account minimum requirements, and education.  Those are three very compelling reasons to save with  401(k) plans.”

Retirement savings outside the 401(k)

According to the report, 66% of those who have access to a plan also save for retirement outside the plan while only 57% of those without the access save for retirement…an encouraging statistic for those who are taking advantage of their work plan, but discouraging in that over 40% of those without a plan at work are not putting anything away for retirement.

Having a Retirement strategy

There is room for improvement here: 61% of workers with access to a plan have a retirement planning strategy compared with 40% of those without one, meaning, of course, that approximately half of all workers have no retirement strategy.  Even more telling is that hardly any participants (9% of those with a plan and 5% of those without a plan) have actually written the plan down somewhere.

More educated

As would be expected, those who participate in 401(k) plans are more educated about retirement than those who don’t.  Workers without a plan are more than twice as likely to state “not sure” when asked how their retirement savings are invested.

Long way to go

Even with these 401(k) successes, Collinson admits that America has a long way to go in preparing for retirement.  For instance, those with a plan estimate that they will need a median of $800,000 to live comfortably in retirement, as compared to $500,000 estimated by those without a plan.  Collinson points out that most Americans will need far more than either of these amounts.

Joe’s Summary: a jaundiced look at survey results

While I believe this survey has merit, I tend to lean toward skepticism in how numbers are interpreted.  After all, Transamerica, the company who did the survey, offers a “wide array of innovative financial services and products”.  They have a stake in the conclusions and could possibly spin the results.   For example, they conclude that the 401(k) helped its users be more savvy investors, but one could also conclude that the reason these investors take advantage of their companys’ retirement plans is because they are already savvy.  Hmmm…kind of like the chicken and the egg.

However, I see no reason for cynicism here.  I am encouraged that 77% of those who have a company plan are actually taking advantage of it.  The 401(k) is certainly not a silver bullet, but (especially with a company match) it is still a solid plan for those who are offered the option.

Readers: Has the recession caused you to increase or decrease your 401(k) contributions?  Why?  If you don’t have access to a 401(k), what plans are you making for retirement.  Do you have a written plan?


{ 9 comments… read them below or add one }

Daniel April 13, 2010 at 9:35 am

That’s a lot of interesting stats. I’m not sure what to make of them, but 77% is fairly high.

Like you said, one of the reasons that 401(k)’s are so popular is that many employers match! Not mine, but if I was getting free money, I’d smack anyone who wanted to take it away.

I invest in my IRA, but among my group of friends, those who don’t have an automatic savings plan don’t save for retirement yet. I think a lot of it is that people don’t like to put in effort, even if its only once to get the ball rolling.


joeplemon April 13, 2010 at 10:32 am

I think the key is making it automatic. The 401(k), even without the match, happens automatically. You have evidently made your IRA automatic (good for you!), but doing takes a little more effort, at least to get it started.

My guess is the friends you mention wouldn’t even miss the money from their budgets once they started making it automatic.


FinEngr April 13, 2010 at 11:52 am

Like your comment on “data cooking” and how the numbers are being interpreted.

Going off the point Daniel brought. How many of those contributing have employer’s that match? Of the ~ 30% who don’t contribute, how many of those have employer matches?


joeplemon April 13, 2010 at 1:01 pm

Great point…It seems that whether the employer contributes to the 401(k) should have been part of the survey, but it wasn’t. The hidden inference of the survey is that contributing to a 401(k) is always a good thing (employer match or not). More spin? Perhaps.


Daniel April 13, 2010 at 2:36 pm

You’re definitely right that they wouldn’t miss it.

So the study is a little biased and we don’t have all the data we want. Do you think TransAmerica is being a little dishonest by only showing us the data that fits their needs?


joeplemon April 13, 2010 at 3:06 pm

Ha Ha. Good question. I would say (as I did in the post) that Transamerica has a stake in how these statistics are interpreted. It would behoove them to use the data in a way that gives them and their agenda credibility. But I stop short of accusing them of dishonesty. I do not claim to know their motives.

My point in bringing up the “spin” factor is that all of us should have a healthy skepticism of statistical studies. It isn’t hard to make numbers mean what you want them to mean.


PT April 18, 2010 at 2:42 pm

If the 401K let someone down, I think they most likely fall into this category: retiring soon & too much into stocks w/in the 401K. As you know Joe, the 401K is simply a vehicle. It’s what’s inside that counts.

I contributed more than I ever have last year. I saw it as a year when stocks went on sale, so I maxed out. Paid a lot less in taxes too.


joeplemon April 18, 2010 at 4:51 pm

It is true that the 401(k) is simply a vehicle. It needs to be managed and maintained to accomplish what the owner’s goals are…just like a vehicle.

Good job on taking advantage of the “stock sale” last year. I did some of that myself.


robert May 14, 2012 at 12:58 am

Ive been contributing to my retirement ive been 21aqnd now im 31. I saved a good amount
but i be hit with some debt so i borrowed 5,800 will hurt me long term??


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