As we enter the new year we at KCS resume our quest to try to maintain defined benefit plans as the primary retirement vehicle. Why? Well, for one, DC alternatives were never intended to be the primary source of retirement income, but a supplemental form for higher wage earners. Second, we have been concerned for quite some time that most individuals are neither comfortable or capable of managing their 401(k). As a result, most participants have not been able to build a retirement nest egg large enough to support even a meager retirement.
How bad are things? According to EBRI / ICI at year-end 2012, “the average 401(k) participant account balance was $63,929 and the median account balance was only $17,630, with wide variation reflecting the many variables in retirement saving, including participant age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates. Older participants and those with longer tenure tend to have higher 401(k) balances at their current employers. For example, at year-end 2012, the average account balance among 401(k) plan participants in their 60s with more than 30 years of tenure was $224,287.”
The $224,287 looks like a large #, but in reality, if the rule of 5% applies for safely spending an annual sum, this asset pool is only providing the beneficiary with about $12,000 per year in addition to what they may receive from Social Security, and before personal savings. In addition, about 21% of all DC participants that can borrow from their plans (loans) do so putting further strain on these meager balances.