Why Are 401(k)/IRA Balances Substantially Below Potential?

30 Pages Posted: 15 Nov 2019

See all articles by Andrew G. Biggs

Andrew G. Biggs

American Enterprise Institute

Alicia H. Munnell

Boston College - Center for Retirement Research

Anqi Chen

Boston College - Center for Retirement Research

Date Written: November 1, 2019

Abstract

For most workers, 401(k)/IRA assets represent the main source of retirement savings outside of Social Security. These accounts can generate significant wealth if workers contribute consistently from a young age, keep their money in their accounts, and minimize their investment fees. However, most workers have 401(k)/IRA balances at retirement that are substantially below their potential. For example, a 25-year-old median earner in 1981 who contributed regularly would have accumulated about $364,000 by age 60, but the typical 60-year-old in 2016 had less than $100,000. The discrepancy is somewhat less if those under 30 and those with defined benefit plans are excluded from the analysis, but still significant. This study uses the Survey of Income and Program Participation, linked with administrative tax records, to explore the reasons for this gap between potential and actual balances and their relative importance. The potential reasons include: the immaturity of the 401(k) system, lack of universal coverage, leakages, and fees.

Suggested Citation

Biggs, Andrew G. and Munnell, Alicia and Chen, Anqi, Why Are 401(k)/IRA Balances Substantially Below Potential? (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3482000 or http://dx.doi.org/10.2139/ssrn.3482000

Andrew G. Biggs (Contact Author)

American Enterprise Institute ( email )

1150 17th Street N.W.
Washington, DC 20036
United States
202-862-5841 (Phone)

HOME PAGE: http://www.aei.org

Alicia Munnell

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Anqi Chen

Boston College - Center for Retirement Research ( email )

Boston, MA
United States
6175521762 (Phone)

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