According to the U.S. Census Bureau, 59% of Americans have access to a 401(k) plan through their employer, but only 32% actually invest in one. Some people would find that shocking, but I don’t. We have a significant percentage of Americans living within 200% of the poverty line in an era of escalating costs for housing, insurance, education, food, etc. Funding a retirement account, although important, isn’t the first order of business for the average American when it comes to allocating their very finite disposable income.
What is worse to me is the fact that only 16% of the private sector workforce (26% if you include public employees) has exposure to a defined benefit pension plan. For many of these participants, their plans have unfortunately become frozen meaning that they are no longer accruing benefits. There is a reason why the US labor force is witnessing tremendous growth in the number of workers 65-years-old or older continuing to work and it’s not because they all aspire to want to be greeters at Walmart. For a majority of this cohort they just can’t afford not to work. Where other age segments of the U.S. labor force have remained stable or declined, this cohort is witnessing annual growth rates in excess of 5%.
The loss of a true retirement vehicle (DB Pensions) in favor of defined contribution (DC) plans is further exacerbating this trend. The uncertainty for individuals in DC plans related to when to retire, what asset allocation to use, and how much to disburse annually from one’s retirement account are incredibly difficult problems to “solve”. DC plans would be great if they were truly supplemental to a DB plan, which was their original intended use. The “great resignation” which we are experiencing today might not have been as robust had DB plans been maintained. The fact that DC participants can jump around from one job to another (provided that they offer a DC plan) is likely one very big unintended consequence brought about by the demise of DB plans. Let’s hope that as DC participants jump around that they don’t actually take premature withdrawals from their previous employer’s offering.