Download Coming Up Short: The Challenge of 401(K) Plans by Alicia H. Munnell, Annika Sundén PDF

By Alicia H. Munnell, Annika Sundén

As the newborn increase starts off to withdraw from the exertions strength, making sure a safe retirement source of revenue turns into an more and more vital factor, the variety of humans over age sixty five is anticipated to double via 2030. That development will proceed, followed through concerns approximately inventory marketplace volatility, company malfeasance, a swiftly altering economic climate, and the viability of Social safety. In bobbing up brief, specialists on retirement coverage research 401(k) plans, the fastest-growing kind of employer-sponsored pensions and a necessary resource of retirement source of revenue for the yankee center classification. Alicia Munnell and Annika Sunden chronicle the advance of 401(k) plans, now the dominant kind of inner most pensions. In obtainable language, they clarify how such plans paintings and speak about their attractiveness. for workers, those plans are attractive becuase they've got extra regulate over their very own retirement money, and the plans are moveable. For employers, the plans are mostly more cost-effective than outlined gain plans. regardless of these merits, there are a few major downsides to 401(k) plans. those plans shift all of the chance and accountability to staff, who needs to come to a decision no matter if to hitch, how a lot to give a contribution, tips to make investments, no matter if to "cash out" whilst altering jobs, and the way to regulate their nest egg in retirement. those are tough judgements, and whereas in idea 401(k)s will be a good mark downs automobile for retirement, in perform many of us make error at each step alongside the way in which. Com ing Up brief discusses why those errors are made and proposes quite a few reforms to make sure that the getting older inhabitants could have enough retirement source of revenue. entire and updated, arising brief is a necessary source on 401(k) plans for monetary provider pros, policymakers, lecturers, and participants making plans for his or her personal retirement.

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41. Poterba, Venti, and Wise (2001), p. 51. 42. Authors’ calculations based on data from the Board of Governors, Flow of Funds (2003), and the Bureau of Economic Analysis (2002). Poterba, Venti, and Wise (2001) may exaggerate the growth in pension assets relative to wages and salary because of data problems and the bull market of the 1990s. The data problem is that asset figures before 1985, particularly for IRAs, are not accurate. The Federal Reserve has created a consistent series for defined benefit, defined contribution, and IRA assets from 1985 to the present.

These figures should be adjusted for the Thrift Savings Plan, which is included in the private sector data and grew from zero in 1986 to about $100 billion in 2002. With this adjustment, the 2002 figure becomes 140 percent of wages and salaries. Thus over the period 1985–2002 the ratio of private pension assets to wages and salaries increased 55 percent. qxd 1/21/2004 12:04 PM Page 39 401(k) Plans and Retirement Income 39 Table 2-6. 401(k) Accumulations at Age Sixty-Two, by Starting Age Dollars Age at which contributions begin 30 35 40 45 50 55 9 percent contribution rate Contribution rate that maintains constant total contributions 353,408 277,007 208,232 146,539 93,358 49,542 353,408 308,845 275,270 244,473 216,763 192,244 Source: Authors’ calculations based on simulations summarized in table 2-2.

As figure 2-4 shows, the percentage of the private sector work force participating in a pension plan in 2002 was virtually the same as in 1979, regardless of how participation is measured. This supports our notion that pension coverage largely reflects an underlying demand by workers for pension benefits and that the growth of 401(k)s replaced coverage under traditional plans. How did this happen? A point worth emphasizing is that the conversion of a defined benefit plan to a 401(k) was extremely rare, particularly among large plans.

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