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The Anti-401(k) Agenda Continues

The Washington Post on Feb. 17 published yet another article attacking the 401(k) system. Fueled by academic studies with a clear anti-401(k) agenda, these articles seem to revel in the entirely unsubstantiated failure of current workplace retirement plans. Not sure who is more to blame: the academics who reach the outrageous conclusions based on either irrelevant or incomplete data, or the media who perpetuate them. Either way, the anti-401(k) agenda is founded on a series of persistent myths, continued in this most recent article, that simply do not reflect the reality of America's retirement plan: the 401(k).

Myth #1: 401(k) Plans Only Benefit the Wealthy

Eighty percent of 401(k) participants make less than $100,000 per year, and almost 40% of 401(k) participants make less than $50,000. That translates to almost 50 million not-so-wealthy working Americans who benefit from 401(k) plans. Even more importantly, moderate income workers participate when covered: More than 70% of workers earning between $30,000 and $50,000 save in their 401(k).

Myth #2: Only Half of American Workers Have Access to a Retirement Plan

The fact is that 8 out of 10 full-time workers are eligible for some kind of workplace retirement plan, the most common of which is by far a 401(k)-style plan. The 50% statistic cited repeatedly by academics and the media includes seasonal and part-time workers that are not generally provided employee benefits pursuant to ERISA.

Myth #3: 401(k) Plans Have Produced Meager Savings

Academics and the media consistently cite low account balances as evidence of the failure of 401(k) plans. However, the statistics they cite conveniently ignore the fact that workers today frequently change jobs and roll over account balances from previous employers’ 401(k) plans into IRAs. In other words, those statistics fail to consolidate all of workers’ retirement savings. The best data available to show combined retirement savings is found by looking at the account balances of those who have been in the same plan for 30 years. At the end of 2010, the Employee Benefit Research Institute found that people between 55 and 64 with 30 years in the same plan had an average account balance of more than $250,000.

Myth #4: The Tax Incentive for 401(k) Plans is Expensive

The critics of 401(k) plans like to cite the high “tax expenditure” cost of the incentives for retirement savings. Once again, they ignore the economic truth by citing a statistic that is determined on a cash basis and ignores present value. Unlike other tax preferences, the tax incentive for retirement savings is a deferral, not a permanent deduction. When the money comes out of the plan it is subject to tax, and the U.S. Treasury gets substantially paid back. In reality, the true present value cost of the tax incentives for retirement is only about half of what these critics say they are.

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