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Growing Better with Age: The 401(k) Turns Forty

By Miriam Bridges and Christina Kilroy

November 30, 2018

This month marks the fortieth birthday of the most prevalent retirement plan available to workers today: the 401(k). It’s a milestone, to be sure, but there are no mid-life doldrums here—401(k) plans continue to grow, and currently hold $5.3 trillion in assets on behalf of more than 55 million active participants and millions of former employees and retirees.

The 401(k) plan’s namesake—perhaps the most recognizable subsection of the US tax code, Section 401, subsection (k)—lets workers contribute a portion of their pay into a tax-advantaged investment account. Participants defer taxes on their contributions until those funds are taken out of the account in retirement.

Although a small number of cash or deferred arrangements (CODAs) had existed since the 1950s, Congress created the modern 401(k) when it passed the Revenue Act of 1978 on November 6, 1978. After the IRS issued proposed regulations three years later, employers began to adopt the plans in earnest. Large employers typically offered 401(k) plans as a supplement to their existing defined benefit (DB) plans—commonly known as traditional pensions—rather than as a stand-alone retirement option. Over time, firms that did not already have a retirement plan, particularly start-up businesses, adopted 401(k) plans as their primary retirement plan and as funding rules for traditional pensions tightened, many employers made 401(k)s their primary plans. 

The 401(k) fits the needs of American companies and workers as our workforce has changed. And today’s private-sector retirement system—including both DB and defined contribution (DC) plans such as the 401(k)—is providing more benefits to more people than ever before. Retirees today receive more income, on average, than their counterparts in the 1970s who only had access to DB plans. ICI research shows that the share of retirees with private-sector retirement income has nearly doubled since 1975. More importantly, the median amount received by retirees has increased by more than 50 percent—and this is true across income groups.

Forty and Favored

The 401(k) is an increasingly important part of a retirement system that has helped retirees maintain or increase their spendable income—a fact that is not lost on American workers. In an ICI study on Americans’ views of DC plans, the results were clear: more than three-quarters of households—whether they owned these accounts or not—were confident in the ability of DC plans to help people meet their retirement goals. At 84 percent, confidence was even higher among those who owned DC accounts or individual retirement accounts (IRAs).

DC plan account owners also expressed appreciation of the basic features of this form of retirement saving, including the opportunities for individual choice in investing, the tax treatment of the savings, personal control of the retirement assets, and the ability to save and invest automatically, paycheck by paycheck. 

Growing Better with Age

401(k)s have evolved to become an effective building block in providing retirement security to millions of working Americans. The 401(k) can be stronger still—working together, policymakers, employers, and the financial industry can further strengthen the 401(k). Improvements, such as automatic enrollment, automatic increases in contributions, and target date funds have made saving in 401(k) plans easier for workers. Easing administrative complexities would make it easier for small employers to offer plans, building on the 40-year record of growth and innovation of our current retirement system and fostering its future success.

The 401(k) is set to conquer its forties and continue providing Americans with incentives to save, invest, and think long-term.

401(k) Resources

If you’re one of the many millions of American workers who is focused on saving in a 401(k) plan, ICI has resources to help you learn more:

See ICI’s 401(k) Resource Center, where we have all of the above resources and more, including videos, news releases, and policy statements. Also, follow us on social media—including Facebook, Twitter, and LinkedIn—to receive information about top news stories on the industry, notices of ICI releases, and stories on 401(k)s and retirement.

Miriam Bridges is ICI’s editorial director and Tina Kilroy is vice president of the ICI Education Foundation.

Permalink: https://www.ici.org/viewpoints/view_18_401k_bday

TOPICS: Investor ResearchPolicy ResearchRetirement PolicyRetirement ResearchSavingsShareholderTarget Date Funds

28 Trillion Smart Decisions

By Christina Kilroy

October 22, 2018

Have you ever done one small, smart thing that ended up making a huge difference in your future? I’m not talking about blind luck—like buying a ticket that turns out to be the winner in the (currently) $1.6 billion Mega Millions. No, I’m talking about small, smart decisions that can materially affect us later in life....

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TOPICS: Investment EducationMutual FundRetirement ResearchSavingsShareholderTaxes

IRA Investors Are Concentrated in Lower-Cost Mutual Funds

By James Duvall

August 8, 2018

Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $9.2 trillion at year-end 2017. Forty-seven percent of this total is held in mutual funds, with IRA mutual fund investors primarily invested in equity funds. As part of ICI’s ongoing efforts to shed light on important insights into IRA investing, ICI is offering an updated analysis of expense ratios that investors pay on mutual funds in their IRAs....

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TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder

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