401(k) Plans are Still Coming up Short

Abstract

The release of the Federal Reserve's 2004 Survey of Consumer Finances (SCF) is a wonderful opportunity to re-assess the role that 401(k) plans are playing in the provision of retirement income. The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on households' assets, liabilities, and demographic characteristics. Because the SCF over-samples wealthy individuals, it provides the most comprehensive measure of wealth of any household survey. The 2001 survey showed that 401(k) accumulations were coming up short. The 2004 survey shows some progress but most of the problems persist. 401(k) plans require the employee to decide whether or not to join the plan, how much to contribute, how to invest the contributions and when to re-balance, what to do about company stock, whether to roll over accumulations when changing jobs, and how to use the money in retirement. Recent data continue to indicate that at every step along the way a significant fraction of participants makes serious mistakes. A fifth of those eligible to participate in a plan choose not to do so. Only about 10 percent of those who do participate contribute the maximum. Over half fail to diversify their investments, many over-invest in company stock, and almost none re-balance their portfolios in response to age or market returns. Most importantly, many cash out when they change jobs.