Jun 4, 2024 - Business

High earners capture most of the benefits of the 401(k) match

an illustration of a piggy bank with a velvet rope surrounding it

Illustration: Tiffany Herring/Axios

A mainstay of 401(k) retirement plans, the employer match, mostly benefits top earners and exacerbates income inequality in the U.S., finds a new study from Vanguard.

Why it matters: The 401(k) is a linchpin of the American retirement system, but as a record number of Americans are now turning 65, worries are rising that these plans aren't adequate, particularly for lower earners.

Catch up fast: The Vanguard report builds on a paper out late last year from economists at MIT, Harvard, Yale, and the Census Bureau.

  • They found that these matches amplify differences in how much different groups save for retirement — Black and Hispanic workers contribute less to these accounts. And the rich (and their children) save more.

How it works: To incentivize workers to save for retirement, employers typically contribute to employee 401(k) accounts by matching some portion of the employee contribution.

  • Vanguard found a wide range of match programs. In the most typical, if an employee puts in 6% of her income, the company will match half — meaning she's socking away an amount equal to 9%.
  • Employers contribute $212 billion a year to worker 401(k)s, per Vanguard — 58 cents per dollar participants saved.

By the numbers: Looking at data from more than 1,300 companies' 401(k) plans, the researchers found that the top 20% of earners within a company receive 44% of employer contributions.

  • The bottom 20% receive just 6% of the money.
  • "The system seems to be rewarding those who already can and do save the most," says Fiona Greig, global head of investor research and policy at Vanguard.

Follow the money: Vanguard finds the top 20% pull in 39% of the income — before considering these 401(k) matches.

  • The 401(k) contributions are even more disproportionate — the top earners receive an 11% larger share of employer contributions than income.
  • The bottom take in 29% less than their share of the income.

The researchers also conclude that employer matches aren't incentivizing workers to save more money for retirement — those who save more are typically those who earn more money and can better afford to save.

  • Only 13% of workers contribute the exact amount required to get the maximum employee match, suggesting that it alone is not much of an incentive to save, the researchers say.

Auto-enrollment, in which workers are put into 401(k)s and must opt-out if they don't want to participate, could promote more retirement savings for low-income workers, they conclude.

  • So could "nonelective contributions," where an employer puts money into your 401(k) even if you contribute nothing.

Zoom out: We are in the midst of a "silver tsunami," in which 4.1 million Americans will turn 65 annually, this year through 2027, a record number per data from the Alliance for Lifetime Income.

  • And these folks will be "going it alone," as Felix Salmon reported in April. They're the first generation to rely on private savings like 401(k)s instead of pensions.
  • Those private savings, even combined with Social Security, may not be enough to sustain their lifestyles.

The bottom line: With a retirement crisis looming, workers need the money from those 401(k) matches — but that money is not distributed equitably.

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