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Thanks to America’s retirement system, successive generations of American retirees have been better off than previous generations. Mutual funds and other registered investment companies play a vital role in that system, serving tens of millions of savers who benefit from funds’ robust regulatory framework and their capacity to offer diversification, transparency, and low-cost investing.
Drawing on data and policy analysis, this page highlights key points about the U.S. retirement system. Click the links at the top to jump to each key point. In addition to the information below, you can get ICI news and views on retirement by following us online at Facebook, Twitter, Google+, LinkedIn, or our video channel on Vimeo.
- America’s Retirement System Is Working
- Americans Support and Value Defined Contribution Plans
- 401(k) Plans Can Help Workers Save Enough for Retirement
- Most Workers Focused on Retirement Have Access to a Retirement Plan
- Defined Contribution Plans Are Well Suited to America’s Mobile Workforce
- Retirees Get More Income from Private-Sector Retirement Plans Now Than in the 1970s
- Tax-Deferred Compensation Is Not Tax-Free Compensation
- Investors Are Sensitive to Fees in a Very Competitive 401(k) Market
- 401(k) Fees Are Clearly Disclosed
- Fees Pay for Services That Are Valuable to Investors
- The Defined Contribution Plan System Educates Participants About Saving and Investing
- Policymakers Can Take Further Steps to Strengthen America’s Retirement System
- For More Information
ICI’s examination of data and academic research on the U.S. retirement system finds that it has successfully provided adequate retirement resources to Americans. Research shows that most households are able to maintain their standard of living when they retire. Analysis of household survey data also shows that successive generations of retirees are better off than previous generations—on average, more-recent retirees have higher levels of resources to draw on in retirement than previous generations.
The Retirement Pyramid
Retirement resources are best thought of as a pyramid with five basic components: Social Security, homeownership, employer-sponsored retirement plans (defined benefit and defined contribution), individual retirement accounts (IRAs), and other personal savings. The pyramid is a better way to think about retirement resources than the old “three-legged stool” (Social Security, pensions, and personal savings) metaphor because households don’t need to rely on each part of the retirement pyramid equally to maintain their standard of living in retirement. The composition of the retirement resource pyramid—that is, the extent to which retirees rely on any given resource—differs from household to household. For example, while Social Security covers households across all levels of earnings, it replaces the largest portion of average lifetime earnings for those with low lifetime earnings.
- Summary: Our Strong Retirement System: An American Success Story (pdf) Dec 4, 2013
- Our Strong Retirement System: An American Success Story (pdf) Dec 4, 2013
- The Success of the U.S. Retirement System (pdf) Dec 5, 2012
- ICI Analysis of U.S. Retirement System: It is Working and Serving Each Generation Better than Previous Dec 5, 2012
- “How Did the Recession of 2007–2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?” Social Security Bulletin (December 2012)
- “The Interplay of Wealth, Retirement Decisions, Policy, and Economic Shocks,” Michigan Retirement Research Center Working Paper (September 2012, pdf)
Survey research consistently shows that solid majorities of U.S. households have favorable impressions of defined contribution (DC) plan accounts such as 401(k) plans. Most households’ impressions are shaped by the ability of these accounts to accumulate significant savings, the performance of retirement plan account investments, and personal experience with such plans. DC account–owning households also appreciate choice in and control of the investments in their retirement plan accounts.
In addition, U.S. households strongly believe that lawmakers should maintain current tax incentives for retirement savings. Recent research from ICI finds that about 80 percent of surveyed households—whether they hold a retirement account or not—agreed that retirement savings incentives should continue to be a national priority.
Today’s 40-year-olds are the first group of workers who will spend their full career in a 401(k)-based system. Studies conducted by ICI and the Employee Benefit Research Institute, as well as by academic economists, show that these workers can replace a substantial portion of their working income in retirement from their accumulated 401(k) assets. For example, in “The Changing Landscape of Pensions in the United States,” James Poterba of the Massachusetts Institute of Technology, Steven Venti of Dartmouth College, and David Wise of Harvard University conclude that “the advent of personal account saving will increase wealth at retirement for future retirees across the lifetime earnings spectrum.”
- 401(k) Participants in the Wake of the Financial Crisis: Changes in Account Balances, 2007-2011 (pdf) Oct 17, 2013
- Key Facts and Positions: Adequacy of 401(k) Plans to Meet Retirement Needs (pdf) Apr 22, 2013
- Key Facts and Positions: Asset Allocation and Managing Risk in 401(k)s (pdf) Apr 22, 2013
- 401(k) Investors Continued to Diversify in 2011 Dec 20, 2012
- 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011 (pdf) Dec 20, 2012
- "Can 401(k) Plans Provide Adequate Retirement Resources?" Public Finance Review (March 2012)
- "The Changing Landscape of Pensions in the United States," NBER Working Paper (September 2007)
- Can 401(k) Accumulations Generate Significant Income for Future Retirees? (pdf), November 2002 Nov 30, 2002
Analysis of government survey data has found that, in 2011, nearly three-quarters of workers most likely to be focused on saving for retirement had access to a retirement plan—including defined benefit (DB) and DC plans—through their own employer or their spouse’s employer, and that 93 percent of those with access participated. More importantly, looking at working households near retirement in 2010, 81 percent had accrued benefits in employer-sponsored retirement plans, IRAs, or both.
- Who Gets Retirement Plans and Why, 2012 (pdf) Oct 3, 2013
- Americans Likely to Be Focused on Retirement Savings Have Access to Employer-Provided Plans Sep 26, 2012
- Who Gets Retirement Plans and Why, 2011 (pdf) Sep 26, 2012
American workers are mobile, moving from job to job or even from career to career. That puts a premium on retirement benefits that are “portable”—benefits that can travel with a worker and continue to grow throughout his or her lifetime. DC plans, such as 401(k) plans, provide this portability. Taking into account the risks faced by retirement plan participants—for example, the investment risk faced by workers in DC plans and the job turnover risk faced by workers in DB plans—several studies have concluded that the majority of workers who have access only to DC plans during their working careers will be better off than if they had access only to DB plans.
- Key Facts and Positions: Access to Retirement Accounts Prior to Retirement (pdf) Apr 22, 2013
- The Future of Retirement Sep 27, 2012
- "The Decline of Defined Benefit Plans and Job Tenure," Journal of Pension Economics and Finance (July 2009)
- "Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth," Journal of Public Economics (November 2007)
- “How Will 401(k) Pension Plans Affect Retirement Income?” American Economic Review (March 2004)
Contrary to conventional wisdom, retirees across all income groups are collecting more in retirement income today from private-sector employer-sponsored retirement plans than they were in the mid-1970s, when sweeping pension legislation was passed to shore up private-sector retirement plans.
- A Look at Private-Sector Retirement Plan Income After ERISA, 2012 (pdf) Oct 17, 2013
- Facts About Defined Contribution Plans and Retirement Security (pdf) Jun 5, 2013
- Private-Sector Retirement Plan Income Steady Oct 22, 2012
- A Look at Private-Sector Retirement Plan Income After ERISA, 2011 (pdf) Oct 22, 2012
Commentators frequently refer to the “tax-free” treatment of retirement savings, equating contributions to retirement savings to employer-paid health benefits (which are excluded from income) and mortgage interest (which is deducted from income). As a result, they assert that the tax savings from a $1 tax-deferred contribution is 3.5 times greater for a taxpayer in the 35 percent tax bracket than for a taxpayer in the 10 percent bracket.
Such assertions are incorrect. Unlike income that is excluded or deducted, deferred compensation is eventually taxed when it is withdrawn from a retirement account, meaning that the benefits of tax deferral cannot be calculated in the same way as benefits of an exclusion or deduction. The benefits calculation for tax-deferred compensation, such as 401(k) contributions, is not just a function of the individual’s marginal tax rate, but also one that involves the uncertain effects of time and rates of return.
- Retirement Savings Tax Breaks Aren’t Driven Solely by Tax Brackets Sep 11, 2012
- The Tax Benefits and Revenue Costs of Tax Deferral (pdf) Sep 11, 2012
The 401(k) market is highly competitive, with many types of providers vying for market share. 401(k) plan sponsors and participants have shown themselves to be sensitive to fund fees and expenses. According to ICI’s most recent research, for example, more than three-quarters of stock fund assets held in 401(k) plans were invested in funds with expense ratios of less than 1 percent. This sensitivity is consistent with the broader trend of declining fees across the fund industry. Since 1993, for example, average expenses and fees for investors in U.S. equity funds have dropped by nearly 30 percent.
Employers and employees generally share the costs of operating 401(k) plans. As with any employee benefit, the employer typically determines how the costs will be shared. In addition, pension law ensures that 401(k) plan sponsors—generally, employers—have a fiduciary responsibility to act in the best interest of plan participants. The sponsor’s choice of options offered in the 401(k) plan menu is held to this high standard.
- The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2012 (pdf) Jun 12, 2013
- Focus on Funds: 401(k) Advancements Apr 26, 2013
- The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2010 (pdf) Jun 29, 2011
- The Average Expense Ratio Incurred by 401(k) Investors in Stock Funds Declined in 2010 Jun 29, 2011
Under Department of Labor (DOL) rules, employers and workers receive a standardized set of disclosures on all investment options in their 401(k) plans. These disclosures highlight any plan-level fees and ensure greater uniformity of disclosures from investment type to investment type. The DOL rules, which went into effect in 2012, were strongly supported by ICI.
In this respect, information that has long been available from mutual funds—for example, the identification of investment objectives, principal strategies and risks, historical performance, and fees—now must be provided directly to participants for both mutual fund and non–mutual fund investments. This uniformity makes it easier for participants to make well-informed investment choices.
- Frequently Asked Questions About 401(k) Participant Disclosure Nov 30, 2012
- Regulation and Disclosure of Mutual Fund Fees Under the Securities Laws (pdf) Jun 13, 2007
All investments—including such retirement savings systems as DC, DB, or hybrid plans—involve fees and expenses. Among other things, fees cover the cost of investment management and services (including custodial, legal, transfer agent, and recordkeeping services) that are essential to the operation of retirement plans.
Research conducted by Deloitte Consulting LLC on behalf of ICI has examined the “all-in fee,” which is a comprehensive measure of administrative, recordkeeping, and investment-related fees—paid by the plan sponsor, the participant, or the plan—as a percentage of plan assets. The study showed that the median DC plan participant has an all-in fee of 0.78 percent of assets, with fees ranging from 0.28 percent (the 10th percentile participant) to 1.38 percent (the 90th percentile participant). Larger plans tended to have lower all-in fees.
- Key Facts and Positions: Trading Costs and 401(k)s (pdf) Apr 22, 2013
- Key Facts and Positions: 401(k)s and Fees (pdf) Apr 22, 2013
- Inside the Structure of Defined Contribution/401(k) Plan Fees Nov 15, 2011
- Retirement Plan Fees Driven By Many Factors: Deloitte/ICI Study Nov 15, 2011
Plan sponsors, financial services providers, and regulators provide workers and participants valuable information about saving and investing in retirement plans. Nine in 10 DC account–owning households indicate that their employer-sponsored retirement account helps them think about the long term, not just their current needs. Plans provide educational materials to participants through mailings, brochures, website information, and tools and calculators.
Policymakers can and should take a range of steps to create a better retirement future for America. These include putting Social Security on a sound financial footing; helping workers gain a deeper understanding of retirement savings; fostering more innovations, such as automatic savings escalation and new ways to manage retirement income; and facing up to fiscal challenges without undermining retirement savings.
For more information, please visit ICI’s:
- 401(k) Resource Center
- Research, Policy Priorities, and Government Affairs areas, which have sections pertaining to retirement
- Viewpoints blog posts about 401(k) plans and retirement policy