401(k) Plans in 2010: An Update from the SCF

The release of the Federal Reserve’s 2010 Survey of Consumer Finances (SCF) is a great opportunity to assess how conflicting forces – the maturation of the system and the Pension Protection Act of 2006 on the one hand and the devastating effects of the 2008 financial collapse and Great Recession on the other hand – have affected workers’ 401(k) accounts. The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on their assets, liabilities, and demographic characteristics. The 2001, 2004, and 2007 surveys showed some improvement in terms of 401(k)participation, contribution levels, investment choices, and cashing out. But median holdings of those approaching retirement remained low even at the peak of the market in 2007. This brief explores the extent to which the positive trends in 401(k) behavior have persisted in the weak economy and how balances have fared in the wake of the financial collapse. The discussion proceeds as follows. The first section describes the importance of 401(k) plans in the retirement income system. The second section assesses the impact of the Pension Protection Act of 2006, which was designed to make 401(k)s easier and more automatic, on plan provisions and 401(k)outcomes. The third section documents the trend in individual decisions regarding 401(k)s. The fourth section reports on 401(k) balances. The fifth section describes emerging issues regarding the 401(k) system – namely, the risks associated with the decumulation of 401(k) plan assets in retirement and the migration of assets from 401(k)s to Individual Retirement Accounts (IRAs). The final section concludes that the Pension Protection Act has had only a limited impact on plan provisions, financial pressures have reversed some of the positive trends in individual behavior, and 401(k)s have been battered by the financial markets. As a result, median 401(k)/IRA balances for households approaching retirement remain at $120,000, roughly the same as in 2007. Median balances for younger households have actually declined. The low balances are a serious problem because 401(k)s have become the only supplement to Social Security for most private sector workers.