401(k)/IRA Holdings in 2016: An Update from the SCF

The key supplement to Social Security benefits is accumulations in employer-sponsored retirement plans. Increasingly these accumulations occur in 401(k) plans and Individual Retirement Accounts (IRAs). The release of the Federal Reserve’s 2016 Survey of Consumer Finances (SCF) is a great opportunity to see how a strengthening economy, the continued maturation of the 401(k) system, and steady stock market returns have affected workers’ retirement wealth. The big advantage of the SCF is that it provides information not only on 401(k) balances, much of which is available from financial services firms, but also on household holdings in IRAs, which are largely rollovers from 401(k)s. Essentially 401(k)s serve as the collection mechanism for retirement saving, and IRAs serve as the resting place. This brief reports on household holdings in these two sources combined. The discussion proceeds as follows. The first section describes the importance of 401(k) plans and IRAs in the retirement income system. The second section documents the trend in individual decisions regarding the accumulation of assets in 401(k)s. The good news is a slight increase in participation rates and greater use of target date funds; the bad news is flat total contribution rates, high fees, and significant leakages. The third section reports on 401(k)/IRA balances. The SCF shows – for households approaching retirement – an increase in these balances from $111,000 in 2013 to $135,000 in 2016. But only about half of households have 401(k)/IRA balances; and, as defined benefit plans phase out in the private sector, the rest will have no source of retirement income other than Social Security. The final section concludes that 401(k) plans could work much better and balances would be higher if all plans were fully automatic – auto-enrollment for both existing and new employees and auto-escalation in the default contribution rate – and contribution rates were set at realistic levels.