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What's a 401(k)?

Key takeaways

• A 401(k) is a retirement savings plan that lets you invest a portion of each paycheck before taxes are deducted depending on the type of contributions made.
• Because of 401(k) tax advantages, the federal government imposes some restrictions about when you can withdraw your 401(k) contributions.

401(k)s are the most popular retirement savings plan. More than 60 million Americans—or about 38% of the working population—use one to invest money they'll live off in retirement. 1

But just because they're common doesn't mean they're well understood. Whether you're a veteran retirement saver or are just getting started, here's what you need to know about 401(k)s and how they work.

Feed your brain. Fund your future.

What is a 401(k)?

Named for the tax code section that created it, a 401(k) is an employer-sponsored retirement savings plan with special tax benefits. (The exact tax advantages depend on which kind of 401(k) contributions you make—more on that later.) Employers typically offer 401(k)s as part of a benefits package to attract and retain workers.

Not everyone has access to a 401(k). Depending on your industry, you may be able to contribute to a similar retirement plan, like a 403(b) or 457(b), instead of a 401(k). Self-employed people can open a type of 401(k) on their own called a self-employed 401(k), and anyone who earns an income (or who is married to someone who does) can save for retirement—in addition to a 401(k) or in place of one—within an individual retirement account (IRA).

How does a 401(k) work?

401(k)s let you contribute part of each paycheck into a retirement account, where you can generally invest your assets in various types of mutual funds, such as index funds or target date funds.

The ability to invest for retirement is a major incentive to use a 401(k)—investing your money gives it a chance to benefit from compounding returns and a potential to grow over time. But 401(k)s also offer tax advantages. Unlike contributions to regular brokerage accounts, contributions to a traditional 401(k) are not taxed until you begin withdrawals in retirement. Unless an exception applies, distributions prior to turning 59½ may be subject to a 10% tax as an early distribution penalty in addition to federal income taxes. Depending on where you live, you may also be taxed at the state and local levels.

Some employers offer a second type of 401(k) called a Roth 401(k), where you invest after-tax money today and don't pay income taxes on your withdrawals in retirement. Not sure which to pick? See whether contributing to a Roth or traditional 401(k) —or even both—makes sense for you.

401(k) advantages

401(k)s can be a helpful tool to fund a secure retirement. A few key benefits include:

The science is clear: We are more likely to save when we don't have to think about it. 2 That's where 401(k)s shine. By automatically funneling money from your paycheck to your retirement savings, there's no opportunity to spend the money on anything else.

Employer contributions

A key advantage of 401(k)s is that your employer may also contribute to help you save for retirement. This typically comes in the form of a 401(k) match, aka when your company agrees to contribute a certain amount based on what you contribute. This may come in the form of a full, dollar-for-dollar match up to a certain percentage of your salary or a partial match, where your employer matches a fraction of what you do, such as 50%, up to a percentage of your salary.

Fidelity suggests aiming to contribute at least enough to get the full match amount .

Compounding

Compounding is when your investment returns earn returns of their own. Because it puts your money to work for you, compounding returns could help make it easier to achieve your financial goals.

The potential snowball effect of compounding makes early saving or investing, particularly in tax-advantaged retirement accounts like a 401(k), that much more enticing since the earlier you start investing, the more compounded returns you can hope to make.

401(k) contribution limits

The annual employee 401(k) contribution limit is $22,500 in 2023 for those under age 50. This increases to $23,000 in 2024. If you contribute to both a traditional 401(k) and a Roth 401(k), the combined contribution limit for both accounts is still $22,500 in 2023. Having two different kinds of 401(k)s does not double the contribution limit. Those age 50 and older can contribute an additional $7,500 as a catch-up contribution in both 2023 and 2024.

Most 401(k) plans have formulas built in to keep you from running over your annual maximum. If you do exceed the annual 401(k) contribution limit, you have until April 15th of the following year to withdraw the excess contributions. If you don't fix the mistake, you could be taxed twice, once on the excess contributions in the current year and a second time upon withdrawals.

401(k) withdrawal rules

The federal government imposes some restrictions on when you can withdraw money from your 401(k). Generally, you must wait until you're at least age 59½ to access the money without paying a penalty. If you make a withdrawal earlier than that, you may owe a 10% penalty on top of income tax in all but a few circumstances. Those special exceptions include distributions after both reaching age 55 and separating from your employer, financial hardship from medical costs, and foreclosure.

One way to avoid paying the penalty and income taxes is by taking a loan from your 401(k) , which some, but not all, plans allow. Keep in mind, however, that if you take a loan, the repayments will be taken from your paycheck, which means your take-home pay will go down. Also know that any money you take out of your 401(k)—even for a short time—misses out on the opportunity to compound and grow. And if your employment situation changes, you might have to repay your loan in full in a very short time frame. If you can't repay the loan for any reason, the remaining loan balance is considered a withdrawal and you may owe both taxes and a 10% penalty if you're under 59½.

Required minimum distributions (RMD)

According to the IRS, you must withdraw a certain amount of money each year starting at age 73—called required minimum distributions ( RMDs )—from traditional IRAs and workplace retirement plans, including 401(k)s. One notable exception is that retirement plan account owners can delay taking their RMDs until the year in which they retire, unless they're a 5% owner of the business sponsoring the plan. This exception applies to workplace plans for still-working employees only, so owners of traditional IRA, SEP, and SIMPLE IRA accounts must begin taking RMDs once the accountholder reaches RMD age. 

RMDs are equal to a percentage of your total eligible retirement account holdings as of December 31st the prior year and based on your life expectancy. The exact amount can be tricky to calculate, so consider reaching out to a financial or tax professional for help, or try Fidelity's online calculator . It's important to start withdrawing RMDs when required. Otherwise, you may end up owing a penalty of up to 25% of the amount not withdrawn—and that's in addition to taxes you may owe when you eventually take the withdrawal.

What happens to a 401(k) when I switch jobs?

You don't have to break up with your retirement plan when you and your employer part ways. You have several options for what to do with old 401(k)s: keeping your money where it is if your plan allows this, moving it to a rollover IRA, transferring it to your new 401(k), or taking a withdrawal. Each has its pros and cons, which we cover in our guide to 401(k) rollovers .

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How Do 401(k)s Work? Frequently Asked Questions

If you're like most Americans, when you think ''retirement planning,'' you first turn to the 401(k) plan offered by your employer. After all, it's the most common type of retirement plan out there. However, 401(k) plans can be complex, and it's not always easy to understand exactly how these plans work. 

So, what are some important things to know about a 401(k)? We've got answers to many common 401(k) questions.

How does a 401(k) work?

A 401(k) is a tax-advantaged retirement plan that is set up and managed by an employer. Basically, you put money into the 401(k) where it can be invested and potentially grow tax free over time. In most cases, you choose how much money you want to contribute to your 401(k) based on a percentage of your income. Your employer automatically withholds a portion of each paycheck and puts it into the account.

With a traditional tax-deferred 401(k) , this money is taken out of your paycheck before federal income taxes are figured, providing you the chance to reduce your taxes today. You pay ordinary income taxes on the pre-tax contributions and growth when you make a withdrawal in retirement. Note: You must be older than 59 1/2 (age 55 if you separate from your current employer) to avoid penalties on withdrawals .

Some employers offer a Roth 401(k) . Contributions to these plans are made with after-tax money, which means you don't get a tax deduction. Instead, your money can potentially grow tax free and be withdrawn in retirement without any taxes. Note: To avoid penalties and/or taxes on withdrawals, you must hold the account for at least five years and be older than 59 1/2 (age 55 if you separate from your current employer).

In both types of plans, you typically have a separate account in the 401(k) registered in your name, and you'll get regular statements. Generally, you can choose from a range of investments to fit your risk tolerance and time to retirement. Each 401(k) plan tends to offer different investments, as well as whether you must pick your own investments or choose to have your account managed for you.

How much can I contribute to my 401(k)?

Your contribution to a 401(k) depends on the limits set by the IRS each year. The IRS looks at inflation to determine the annual contribution limits. For 2024, the employee deferral limit is $23,000. For those 50 or older, the IRS allows ''catch-up'' contributions of up to $7,500, for a total contribution of $30,500. 

It's a good idea to review the contributions you set up on your account annually, to ensure you’re putting away as much as possible.

How does 401(k) matching work?

One of the most important aspects of a 401(k) is the matching contributions your employer can make to your account. It’s basically a "free" contribution.

Typically, employer matching contributions are based on a percentage of the contribution you make and a percentage of your wages. For example, let's say you earn $6,000 per month, and your employer matches 50% of your contributions up to 6% of your wages. If you wanted to get the full match, you'd need to contribute at least $360 per month (6% of your monthly wages) to your account, and your employer would kick in an additional $180 (50% of $360) to match your contribution. As a result, your retirement account would see a combined contribution of $540 per month.

A common 401(k) question about employer matching is whether employer match counts toward your annual contribution limit. The good news is that it doesn't. However, there's a separate limit that affects overall contributions to your 401(k). For 2024, the combined contributions you and your employer can make to the account is $69,000 ($76,500 if you're 50 and older and making catch-up contributions). Of course, the maximum contribution can never exceed 100% of your compensation from the employer.

What is 401(k) vesting?

One of the most important things to understand is how 401(k) vesting works. Vesting is a term that describes how much of the money in your account is actually yours if you were to leave the company or take a distribution.

The contributions you make yourself are immediately vested and considered yours. However, in some companies, matching or other employer contributions aren't considered yours until you've remained with the company for a set period of time. So, if the company has a vesting schedule, you might not be able to keep all the money your employer invests on your behalf until after you've stayed at the company for the required time frame.

What happens if I make a 401(k) early withdrawal?

Generally, if you take money from your account before you reach age 59 ½, you'll have to pay taxes on the amount, plus pay a 10% penalty to the IRS. But there are some exceptions to the early withdrawal penalty.

One exception is known as the Rule of 55—if you lose (or leave) your job at age 55 or older and take distributions from the 401(k) associated with your most recent job, you won't have to pay the 10% penalty. Some other circumstances that might allow you to avoid the 10% penalty include:

• Certain qualified birth or adoption expenses
• A series of substantially equal payments
• Permanent disability

You might have to provide documentation to avoid penalty in these cases, so make sure you're prepared to do so. To learn more about the exemptions to the 10%, see the IRS website .

Can I contribute to an IRA and 401(k)?

Yes, it's possible to contribute to both a traditional individual retirement account (IRA) and a 401(k). However, if you’re eligible to contribute to a 401(k), then your IRA tax deduction may be limited, but your IRA contribution will not. Whether you actually contribute to the 401(k) is irrelevant—merely being eligible for a 401(k) means you'll have to review your modified adjusted gross income to determine if your IRA contribution is eligible for a tax deduction. But the IRA contributions you make won’t affect your 401(k) contributions. Check out IRS Publication 590-A for an explanation of the IRA deduction rules.

How much should I contribute to my 401(k)?

How much you should contribute to your 401(k) depends on your retirement goals and how much you hope to amass in your nest egg by the time you retire. While you don't have to contribute the maximum allowed by the IRS, it's worth noting that the more you invest now, the more of a head start you'll likely have toward a comfortable retirement.

If you have more questions, be sure to ask a tax professional or financial advisor for more information about using a 401(k) to your advantage.

How much will you need to retire?

More from charles schwab.

What to Know About Catch-Up Contributions

401(k) Tax 'Deduction:' What You Need to Know

Understanding 457(b) vs. 403(b) Retirement Plans

Related topics.

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Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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What Is a 401(k) and How Does It Work?

Beginner's guide to 401(k)s and what you need to know to get started

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Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

• What Is a 401(k) and How Does It Work? CURRENT ARTICLE
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A 401(k) is a retirement savings plan that provides tax advantages to savers. Named after a section of the U.S. Internal Revenue Code, the 401(k) is an employer-provided, defined contribution plan . The employer may match employee contributions; with some plans, the match is mandatory.

There are two major types of 401(k)s: traditional and Roth . With a traditional 401(k), employee contributions are pretax, meaning they reduce taxable income, but withdrawals in retirement are taxed. Employee contributions to Roth 401(k)s, on the other hand, are made with after-tax income. There's no tax deduction in the contribution year, but withdrawals—qualified distributions—are tax-free.

Key Takeaways

• A 401(k) plan is a company-sponsored retirement account in which employees can contribute a percentage of their income. Employers often offer to match at least some of these contributions.
• There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.
• Employer contributions can be made to both traditional and Roth 401(k) plans.

"The most important thing to know when making any decision about your 401(k) is to use it. In a perfect world, you put the maximum amount in it, but at a minimum , you should contribute up to the point where your company matches what you put in," said Peter Lazaroff , financial advisor and chief investment officer at Plancorp.

In 2023, Americans saved an average of 7.1% of their salaries in their 401(k)s , which was higher than the overall personal savings rate that year. Less than 12% of working-age Americans were on track in 2023 to "max out their retirement contributions", though the 401(k) employee contribution limit for 2023 was $30,000 (including "catch-up" contributions ) for those 50 and older and $22,500 for those under 50. (In 2024, those numbers are $30,500 and $23,000, respectively.)

Below, we walk you through how to start a 401(k), how 401(k) plans work, and strategies for making the most of them.

Investopedia / Ellen Lindner

• Contact your employer. Ask if a 401(k) is available, and whether there is a company match.
• If a 401(k) is available, the company will instruct you how to sign up with new paperwork.
• Choose your investments. There should be a range of options, from conservative to aggressive. A popular option is the target date account, which automatically adjusts the asset mix to align with a preset retirement date. It typically becomes more conservative as you near retirement.
• If you are self-employed or run a small business with your spouse, you may be eligible for a solo 401(k) plan , also known as an independent 401(k). These plans allow independent contractors to fund their own retirement. A solo 401(k) can be created through most online brokers.

How 401(k)s Work

Introduced in the early 1980s, traditional 401(k) plans allow employees to make pre-tax contributions from their salaries up to certain limits.

When workers sign up for a 401(k), they agree to deposit a percentage of each paycheck directly into an investment account. Employers often match part or all of that contribution, and employees can choose from a variety of investment options, typically mutual funds.

The U.S. has undergone a significant shift in how Americans save for retirement, as illustrated below by our chart comparing the number of Americans (in millions) in defined benefit and defined contribution plans , along with the total for both.

Defined contribution plans, most of which are 401(k)s, are an alternative to the traditional pension , known as a defined benefit plan. With a pension, the employer is committed to providing a specific amount of money to the employee for life during retirement. In recent decades, as the chart below shows, defined contribution plans like 401(k)s have become far more common, and traditional pensions have become rare as employers have shifted the responsibility and risk of saving for retirement to employees.

Direct contribution plans like 401(k)s allow employees to put part of their salary into individual accounts, often with matching funds from their employer. Their ultimate retirement benefits depend on the account's investment performance.

Comparing the Number of Americans in Defined Benefit vs. Defined Contribution Plans

Investopedia

Above, the number of Americans in defined benefit and defined contribution plans, along with the total of both, in millions.

Initially offered by employers to supplement other employee benefits, 401(k)s have become the most common private employer-sponsored retirement program in the U.S. About a third of working-age Americans have a 401(k), compared with one in nine who have a defined benefit pension plan. Meanwhile, U.S. Census data suggests that as many as four in 10 Baby Boomers (aged 55 to 64) and half of Millennials (aged 24 to 39) have no retirement account at all.

Still, the 401(k) plan was designed to encourage Americans to save for retirement. Among its benefits are tax savings. There are two main options, traditional and Roth, each with distinct tax advantages.

With a traditional 401(k), employee contributions are deducted from gross income . This means the money comes from your paycheck before income taxes have been deducted.

As a result, your taxable income is reduced by the total contributions for the year and can be reported as a tax deduction for that tax year. No taxes are due on the money contributed or the investment earnings until you withdraw the money, usually in retirement.

With a Roth 401(k), contributions are deducted from your after-tax income. This means you contribute from your pay after income taxes have been deducted. As a result, there is no tax deduction in the year of the contribution. When you withdraw the money during retirement, though, you don't have to pay any additional taxes on your contribution or on the investment earnings.

Even though contributions to a Roth 401(k) are made with after-tax money, there are, generally speaking, tax consequences if withdrawals are made before you're 59 ½ . Always check with an accountant or qualified financial advisor before withdrawing money from either a Roth or traditional 401(k).

However, not all employers offer a Roth account option. If one is available, you can choose between a traditional and Roth 401(k). You can also contribute to both up to the annual contribution limit.

Order your copy of Investopedia's What To Do With $10,000 magazine for more wealth-building advice.

401k Plan Contributions Explained

Traditional and Roth 401(k) plans are defined contribution plans. Both the employee and employer can contribute to the account up to the dollar limits set by the Internal Revenue Service (IRS). Employees' contributions to a traditional 401(k) plan are made with before-tax dollars and reduce their taxable income and their adjusted gross income. Contributions to a Roth 401(k) are made with after-tax dollars and do not impact taxable income further.

Employees are also responsible for choosing the specific investments held within their 401(k) accounts from a selection that their employer offers. Those offerings typically include stock and bond mutual funds and target-date funds designed to reduce the risk of losses as the employee approaches retirement.

An employee's account holdings may include guaranteed investment contracts issued by insurance companies and sometimes the employer's own stock.

The maximum amount an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation , which measures rising prices.

For 2024, the annual limit on employee contributions to a 401(k) is $23,000 annually for workers under age 50. However, those aged 50 and over could make a $7,500 catch-up contribution.

If your employer also contributes or if you elect to make additional, nondeductible after-tax contributions to your traditional 401(k) account, there is a total employee-and-employer contribution amount for the year:

• For workers under 50 years old, the total employee-employer contributions can't exceed $69,000 per year.
• If the catch-up contribution for those 50 and over is included, the limit is $76,500.

Employers who match employee contributions use various formulas to calculate that match.

For instance, an employer might match $0.50 for every $1 that the employee contributes, up to a certain percentage of salary. Vanguard estimates that about four in 10 companies have 401(k) matching contributions of up to 6% of their employees’ wages. Only 10% of companies offer more than that.

Lazaroff , who also hosts the investment education podcast The Long Term Investor, said that if you can take advantage of your employer’s matching contributions, you should. It’s a risk-free way to grow your money and not leave part of your compensation on the table.

“Meeting the match doesn’t necessarily mean you have to sacrifice other financial goals, such as paying down debt or establishing an emergency fund,” he said. “You can still chip away at debt and put away small amounts in an emergency fund if necessary. But securing that employer match is crucial.”

Employer contributions can be made to a traditional 401(k) account and a Roth 401(k). Withdrawals from the former will be subject to tax, whereas qualifying withdrawals from the latter are tax-free.

If your employer offers both types of 401(k) plans, you can split your contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).

However, the total contribution to the two types of accounts can't exceed the limit for one account ($23,000 for those under age 50 in 2024).

"Even though everyone has different circumstances, in general, you should try to put in the maximum allowable amount in your 401(k)," said Lazaroff, the Investopedia top-10 financial advisor.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of stock and bond mutual funds, as well as target-date funds designed to reduce the risk of investment losses as you approach retirement.

According to Lazaroff, target-date funds are the way "you're least likely to make mistakes." These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

"You might be different from the average, and you might accumulate enough wealth one day where a target-date fund isn't the most appropriate. But for many people, it's one of the easier and least risky routes to take if available in their plan allows it," Lazaroff said.

Several factors influence the pace and extent of your 401(k)s growth, including the amount you contribute annually, any company matches, investment performance, and the time until retirement.

A significant benefit of a 401(k) is tax-deferred growth. As long as you don't remove funds from your account, you don't have to pay taxes on investment gains, interest, or dividends until you withdraw money from the account after retirement. However, if you have a Roth 401(k), you won't have to pay taxes on qualified withdrawals when you retire, as contributions are made with after-tax dollars.

Crucially, opening a 401(k) when you are young allows your money to grow more over time, thanks to the power of compounding . Compounding occurs when the returns generated by your savings are reinvested into the account, generating returns of their own.

Over many years, the compounded earnings on your 401(k) account can exceed the amount you contributed. This is why, as you continue to contribute to your 401(k), it can grow quite substantially by the time you retire.

401(k) Withdrawals

Once your money goes into a 401(k), it can be difficult to withdraw without paying taxes on the amount.

"Make sure that you still save enough on the outside for emergencies and expenses you may have before retirement," said  Dan Stewart , the head of Dallas-based Revere Asset Management Inc. "Do not put all of your savings into your 401(k) where you cannot easily access it, if necessary."

Earnings in a 401(k) account are tax-deferred for traditional 401(k) accounts and tax-free for Roth accounts. When you withdraw from a traditional 401(k), that money (which has never been taxed) will be taxed as ordinary income. Roth account owners have already paid income tax on the money they contributed. Thus, you won't owe taxes on withdrawals if you satisfy specific requirements .

Both traditional and Roth 401(k) owners must be at least 59½—or meet other Internal Revenue Service (IRS) criteria, such as being totally and permanently disabled—when you start making withdrawals so you don't face any penalties. Usually, there's an additional 10% early distribution tax on top of any other tax you owe if you withdraw early.

Some employers allow employees to take out a loan against their 401(k) plan contributions, essentially borrowing from themselves . If you take out a 401(k) loan and leave the job before repaying it, you'll have to repay it in a lump sum or face the 10% penalty for an early withdrawal.

Traditional 401(k) account holders have required minimum distributions (RMDs) after reaching a certain age. (Withdrawals are called distributions in IRS parlance.)

Account owners who have retired must start taking RMDs from their 401(k) plans at age 73. The size of the RMD is calculated based on your life expectancy at the time. Before 2020, the RMD age was 70½ years old. Before 2023, it was 72. It was updated to age 73 in the omnibus spending bill H.R. 2617 in 2022.

Note that distributions from a traditional 401(k) are taxable, but qualified withdrawals from a Roth 401(k) are not.

Roth IRAs, unlike Roth 401(k)s, are not subject to RMDs during the owner's lifetime.

When 401(k) plans were first rolled out in the early 1980s, companies and their employees had one choice: the traditional 401(k). Then, in 2006, Roth 401(k)s arrived. Roths are named for former U.S. Senator William Roth of Delaware, the primary sponsor of the 1997 legislation that made the Roth IRA possible.

At first, Roth 401(k)s caught on slowly, but now many employers offer them. So, the first decision employees often have to make is choosing between a Roth and a traditional 401(k).

As a general rule, employees who expect to be in a lower marginal tax bracket after they retire might want to opt for a traditional 401(k) and take advantage of the immediate tax break.

Employees anticipating a higher tax bracket after retiring might choose a Roth 401(k) to avoid paying taxes on their savings later. This decision could be especially worthwhile if the Roth has many years to grow, as all the money earned by the contributions over decades will be tax-free upon withdrawal.

As a practical matter, the Roth reduces your immediate spending power more than a traditional 401(k) plan. That matters if your budget is tight.

Since it's difficult to predict what tax rates will be decades from now, many financial advisors suggest putting money into both Roth and traditional 401(k) accounts.

Brokerage and 401(k) accounts are both investment accounts, but they serve different purposes. A 401(k) is primarily for retirement savings, while a brokerage account can be used for various financial goals and offers more control over the investments.

A 401(k) is a type of qualified retirement plan. Within it, you can choose from a menu of investment options (generally mutual funds) where your money grows in a tax-advantaged manner.

A brokerage account, meanwhile, is a private account where you can buy, sell, and hold whatever securities your broker has access to, including mutual funds, stocks, bonds, and exchange-traded funds (ETFs). Brokerage accounts are taxable, meaning that your capital gains and dividends are subject to tax in the current period. There are also no contribution limits, early withdrawal considerations, or minimum distributions.

Note that brokers may also offer individual retirement accounts (IRAs), which share certain features of both 401(k) and individual accounts. Like a 401(k), these retirement accounts grow tax-deferred and have annual contribution limits that are lower than those of a 401(k). They also require RMDs at age 72. But like a brokerage account, they are not employer-sponsored, and you can invest in a range of securities such as stocks, bonds, and ETFs.

Retirement account

Employer-sponsored

Limited menu of investment options

Tax-deferred

Annual contribution limits

Early withdrawal penalties

Potential for employee matching

Can be used for anything

Self-sponsored

Can buy or sell any investment

No contribution limits

No withdrawal penalties

No matching

When you leave a company where you've been employed and you have a 401(k) plan, you generally have four options:

1. Withdraw the Money

Withdrawing the money is usually a bad idea unless you urgently need it. The money will be taxable for the year it's withdrawn. You will be hit with the additional 10% early distribution tax unless you are over 59½, permanently disabled, or meet the other IRS criteria for an exemption from the rule.

For a Roth 401(k), you can withdraw your contributions (but not any profits) tax-free and without penalty at any time if you have had the account for at least five years. However, you're still decreasing your retirement savings, which you may regret later.

2. Roll Your 401(k) Into an IRA

Moving the money into an IRA at a brokerage firm, a mutual fund company, or a bank means avoiding immediate taxes and maintaining the account's tax-advantaged status. What's more, you can choose from among a wider range of investment choices than with your employer's plan.

The IRS has relatively strict rules on rollovers and how they need to be accomplished. Running afoul of them is costly. Typically, the financial institution in line to receive the money will help with the process to prevent any missteps.

Funds withdrawn from your 401(k) must be rolled over to another retirement account within 60 days to avoid taxes and penalties.

3. Leave Your 401(k) With the Former Employer

In many cases, employers permit a departing employee to keep a 401(k) account indefinitely in their old plan, though the employee can't contribute further. This generally applies to accounts worth at least $5,000. For smaller accounts, the employer may give the employee no choice but to move the money elsewhere.

Leaving the money where it is makes sense if the former employer's plan is well-managed and you are satisfied with its investment choices. The danger is that employees who change jobs throughout their careers can leave a trail of old 401(k) plans and may forget about one or more of them. Their heirs might also be unaware of the existence of the accounts.

Capitalize, an investment platform specializing in rolling over forgotten or left-behind 401(k) accounts, estimates that in 2023, there were almost 30 million such accounts in the U.S., holding about a quarter of Americans' total assets in 401(k) plans.

4. Move Your 401(k) to a New Employer

You can usually move your 401(k) balance to your new employer's plan. As with an IRA rollover, this maintains the account's tax-deferred status and avoids immediate taxes.

If you aren't comfortable with managing a rollover IRA, you can leave some of the work to the new plan's administrator.

What Is the Maximum Contribution to a 401(k)?

For most people, the maximum contribution to a 401(k) plan is $23,000 in 2024. If you are more than 50 years old, you can make an additional catch-up contribution of $7,500 for both years. There are also limitations on the employer's matching contribution : The combined employer-employee contributions cannot exceed $69,000 in 2024 (or $76,500 for employees over 50 years old).

Is It a Good Idea to Take Early Withdrawals From Your 401(k)?

There are few advantages to taking an early withdrawal from a 401(k) plan. If you withdraw before 59½, you will face a 10% penalty in addition to any taxes you owe. However, some employers allow hardship withdrawals for sudden financial needs, such as medical costs, funeral costs, or buying a home. This can help you avoid the early withdrawal penalty, but you will still have to pay taxes.

What Is the Main Benefit of a 401(k)?

A 401(k) plan lets you reduce your tax burden while saving for retirement. Not only do you get tax-deferred gains, it's also hassle-free since contributions are automatically subtracted from your paycheck. Many employers will match part of their employee's 401(k) contributions, effectively giving them a free boost to their retirement savings.

A 401(k) plan is a workplace retirement plan that allows you to make annual contributions up to a specific limit and invest that money for your later years after your working days are over.

There are two types of 401(k) plans: traditional or Roth. The traditional 401(k) involves pretax contributions that give you a tax break when you make them and reduce your taxable income. However, you pay ordinary income tax on your withdrawals. The Roth 401(k) involves after-tax contributions and no upfront tax break, but you won't pay taxes on your withdrawals in retirement. Both accounts allow employer contributions that can increase your savings.

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Internal Revenue Service. " Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits ."

Internal Revenue Service. " Hardships, Early Withdrawals and Loans ."

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Plan Design and 401(k) Savings Outcomes

We assess the impact of 401(k) plan design on four different 401(k) savings outcomes: participation in the 401(k) plan, the distribution of employee contribution rates, asset allocation, and cash distributions. We show that plan design can have an important effect on all of these savings outcomes. This suggests an important role for both employers in determining how to structure their 401(k) plans and government regulators in creating institutions that encourage or discourage particular aspects of 401(k) plan design.

• Acknowledgements and Disclosures

MARC RIS BibTeΧ

Download Citation Data

Non-Technical Summaries

• Increasing Retirement Account Participation Author(s): James J. Choi David Laibson Brigitte C. Madrian If the goal is to get more employees to open 401(k) plans, then employees should not be required to actively initiate participation....

Published Versions

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In addition to working papers , the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter , the NBER Digest , the Bulletin on Retirement and Disability , the Bulletin on Health , and the Bulletin on Entrepreneurship  — as well as online conference reports , video lectures , and interviews .

IRA or 401(k)? 3 lesser-known perks to putting your retirement savings in a 401(k)

You could save for retirement in an ira. but here's why you may want to go with a 401(k) plan instead..

It's important to set money aside for retirement throughout your career so you have funds to access later in life. But in the context of retirement savings, you have choices.

Many people opt to save for retirement in an IRA because these plans commonly offer a wide range of investment choices. With a 401(k), on the other hand, you're generally limited to a bunch of different funds to invest in, but you can't hold stocks individually within your plan.

That said, 401(k) plans have their share of benefits. Not only do they offer higher annual contribution limits than IRAs, but many employers that sponsor 401(k)s also match worker contributions to some degree.

But while those may be pretty well-known advantages of 401(k)s, these plans also come with some less obvious perks. Here are three you should absolutely know about so you can make an informed decision on where to house your retirement savings.

1. Funds are more protected from creditors

Under the Employee Retirement Income Security Act (ERISA), creditors are generally not allowed to go after funds from pensions and employer-sponsored retirement plans. An IRA is not an employer-sponsored plan and is therefore not protected under ERISA the same way a 401(k) is.

Now ideally, you won't land in a situation where creditors are coming after your assets to begin with. But in that unfortunate event, you may have a lot more protection with your money in a 401(k).

2. You can sometimes tap your savings penalty-free at age 55

Generally, you'll face a 10% early withdrawal penalty for taking money out of a traditional IRA or 401(k) plan prior to age 59 1/2 . But there can be an exception with 401(k)s known as the rule of 55. If you separate from the employer sponsoring your 401(k) during the calendar year of your 55th birthday (or later), you can often take withdrawals from that company's 401(k) without incurring a penalty.

Let's say you're downsized out of a job at age 57 and have enough money in savings to just retire at that point rather than start over again at a new employer. With a traditional IRA, you'd be looking at a 10% penalty for removing funds at 57. But with a 401(k), you may be able to take that money out penalty-free provided you're tapping the plan sponsored by the same employer that just laid you off at 57.

3. The way they're funded makes you more likely to meet your goals

It's definitely not an easy thing to consistently put money into savings, whether in the bank or an in IRA. The nice thing about 401(k) plans is that you're not writing your plan a check every month or transferring money over once you've paid your bills.

Rather, 401(k) plans are funded via automatic payroll deductions. If you sign up to have $300 a month put into your 401(k), that sum will be taken out of your paycheck each month so you don't even miss it. It's this very system that could be instrumental in helping you stay on track with retirement savings.

When it comes to saving for retirement, you clearly have plenty of options. But it certainly pays to consider these little-known 401(k) plan benefits when making your choice.

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401(k) plan

From pretax contributions and a generous company match to Roth and after-tax options, the Lam 401(k) Plan can help you build the retirement savings you need to meet your goals.

Maximize your savings Learn how to get the most from your money through the Lam 401(k) and other plans. GET THE GUIDE

What you need to know

• Lam will make a true-up contribution after the year ends if there is a difference between the company match you should have received, based on your total contribution for the year, and the total matching contributions you actually received. This process ensures that you receive the full company match.
• The bonus contribution percentage is calculated based on the gross amount of your bonus; however, Roth and after-tax contributions are deducted from your check after the bonus tax rate—which is higher than your regular tax rate—is applied. If your contribution election exceeds available pay, no deduction will be taken.
• For example, in California, the bonus tax rate is approximately 45%, so your maximum Roth or after-tax bonus contribution to your 401(k) cannot exceed approximately 55%. You may want to look at how your last bonus payment was taxed to estimate how much tax you can expect on future bonus payments.
• You choose how to invest your 401(k) balance. You have the flexibility to diversify your portfolio and select from investment options that range from more conservative to more aggressive, depending on your savings goals and risk tolerance.
• You can take your 401(k) with you. It’s portable. If you leave Lam Research, you can take your account balance with you.
• You can consolidate old 401(k) accounts. You can roll over any eligible savings from a previous employer into this plan to make managing your retirement savings a lot easier.
• You can make “catch-up” contributions. If you make the maximum contribution to your 401(k) and are age 50 or older during 2024, you can make additional “catch-up” contributions of up to $7,500 through payroll deductions. You must make a separate election for your catch-up contributions. 
• Fidelity Investments administers the Lam Research 401(k) Plan. You can stop or change your contributions or change beneficiaries at any time by contacting Fidelity through  netbenefits.com  or by calling 800-835-5095. 

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Understanding your options

The Lam Research 401(k) Plan offers you three ways to build your savings, allowing you to choose when and how to pay taxes on your contributions and earnings, depending on your individual financial needs.

1. Pretax contributions

Your contributions come out of your pay before taxes, so you have more take-home pay than you would if you saved the same amount on an after-tax basis. However, all pretax contributions and earnings are subject to income tax when you make a withdrawal in the future.

• This may be a good option if you expect to be in a lower tax bracket after you retire, or if you want to pay lower taxes now by reducing your current taxable income.
• Maximum annual contribution (combined with Roth contributions): For 2024, $23,000 if under age 50 or $30,500 for age 50 and over. 

2. Roth contributions

Your contributions come out of your pay on an after-tax basis. You’ll have a little less in your paycheck than you would if you contributed the same amount on a pretax basis. Roth contributions offer the potential for tax-free income at retirement. You won’t pay taxes on the value of your contributions or any investment earnings, as long as it has been five years since your first Roth contribution and you are at least age 59½ or disabled.

• This may be a good option if you expect to be in a higher tax bracket in retirement, or if you are young and have more time to accumulate tax-free earnings.
• Maximum annual contribution (combined with pretax contributions): For 2024, $23,000 if under age 50 or $30,500 for age 50 and over.

3. After-tax contributions

Like with Roth contributions, you pay taxes up front at your current tax rate. But with after-tax contributions, when you withdraw money at retirement, you pay taxes on the value of any investment earnings on your contributions.

• This may be a good option if you’re already contributing the pretax/Roth maximum and want to have after-tax income you can count on in retirement.
• Maximum annual contribution: $30,000.
• To build more tax-free retirement income, you can convert your after-tax contributions to Roth through a Roth In-Plan Conversion.

Contribution limits

The IRS sets limits on how much you can contribute to your 401(k) each year.

Electing a large Roth or after-tax contribution? Note that your contribution percentage is based on your gross pay , but the Roth and after-tax contributions are deducted from your net pay after taxes . If your contribution election exceeds available net pay, no deduction will be taken. 

Investment options

Choose your funds.  Fidelity provides a number of investment funds so you can build a portfolio that meets your needs. If you’re not sure where to begin, consider the target-date funds. With a target-date fund, you select a fund named for a year close to when you expect to retire, and that fund’s mix of stocks, bonds, and other investments automatically becomes more conservative as the target year approaches. 

Get professional help. Fidelity’s Personalized Planning & Advice service lets you delegate the day-to-day management of your 401(k) to professional investment managers. With a managed account, you can take advantage of Fidelity’s resources and experience to help ensure that:

• Your investments are managed through the ups and downs of the market.
• You’re keeping your accounts aligned with your goals through annual reviews and check-ins.
• Your account is actively managed to create an opportunity for long-term gains while managing the risk associated with investing.

Managed account fees are based on a percentage of your 401(k) account balance.

Do it yourself. Through Fidelity’s BrokerageLink, you can invest in an expanded range of investments beyond those in your plan’s standard lineup. You pay all of the associated costs and bear the risks related to making your own investment decisions.

To review your investment options and determine which approach is right for you, visit  netbenefits.com  or call 866-811-6041.

Where to learn more

• Lam Research 401(k) Guide  [PDF]
• Maximize Your 401(k) Savings [PDF]
• 401(k) Summary Plan Description  [PDF]
• Fidelity Investments: netbenefits.com or 800-835-5095
• Benefits Help Desk: [email protected] 877-291-9494

The 5 changes to the 401(k) that could make a big difference to your retirement

T he 401(k) has become king of the retirement industry, knocking down its competition in pensions and overshadowing the contribution limits of the IRA — but it could use some improvement. 

In the last 40 years, the 401(k) plan has emerged as the most common way for employers to offer a retirement benefit to their employees. Now more than ever before, Americans are responsible for their own future financial security, as companies have moved away from corporate pension plans, which provided a benefit to retirees in a previous era. 

The 401(k) has filled some of the gap, allowing workers to contribute as much as $30,500 a year (for people 50 and older) in 2024 and giving employers the opportunity to make their own contributions to workers’ accounts or to match those made by employees. These plans come with tax benefits, since they can be contributed with pretax dollars, therefore allowing people to set aside more money in their investment accounts to grow with compound interest. 

Nearly $7 trillion was invested in 401(k) plans in the U.S., across more than 700,000 plans and 70 million participants, as of September 2023, according to the Investment Company Institute . Rollovers from 401(k) plans to IRAs account for about half of the $12.6 trillion in IRA assets. In the private sector, 15% of workers had access to a pension, according to the Bureau of Labor Statistics , while 66% of those same types of workers had access to a defined-contribution plan such as a 401(k) or 403(b).  

The federal government has begun to implement laws aimed at nudging workers and employers to prioritize retirement savings, and there are more proposals in the works. In recent years, the Secure Act and Secure 2.0 Act have targeted retirement security, including by expanding access to annuities in 401(k) plans and increasing the age at which retirees must begin taking withdrawals from their retirement accounts. 

But retirement and investing experts say more work can be done for the retirement savers who rely on this workplace benefit — especially when it comes to the distribution of those hard-earned dollars that workers have set aside. 

Financial-services experts and government officials are working on making the 401(k) a more powerful tool for Americans saving for retirement. Here are the five best ways they’ve come up with to improve the 401(k). Given the importance of the 401(k) to the financial futures of so many people, these five changes collectively represent one of the Best New Ideas in Money.  

1. Give credits for long-term family caregivers

In many families, loved ones become caregivers for relatives who are older or who fall ill. Taking on the role of caregiver in some cases means people must cut back on the hours they work for pay or even stop working altogether. The job of caregiver is an important one, but it can come with significant emotional, physical and financial side effects. With fewer hours — or no hours — of paid work, family caregivers not only lose part or all of their paychecks, but they also earn fewer credits toward Social Security or stop earning credits entirely, potentially resulting in a lower benefit. 

The Secure 2.0 Act, which was passed by federal lawmakers in 2022, targeted retirement savers’ need to balance paying down student debt with investing for their future. Under the law, companies can now treat student-loan repayments like 401(k) contributions and provide a match to the worker’s retirement account. The same concept should apply to family caregivers, who also lose out on retirement savings through workplace plans when they decrease their hours or step away from their jobs, said Jamie Hopkins, senior vice president of Private Wealth Management at Bryn Mawr Trust. “People providing long-term care are providing valuable work services,” he said. “It is impacting their ability to save for retirement.” 

U.S. Rep. Chris Pappas, a New Hampshire Democrat, in December introduced a proposal called the Expanding Access to Retirement Savings for Caregivers Act that aims to take care of caregivers. The proposal, which Pappas co-sponsored with Republican Reps. Claudia Tenney of New York and Debbie Lesko of Arizona, would allow people to make catch-up contributions to retirement accounts such as 401(k) plans and IRAs if they took time away from work to serve as a caregiver. 

The care that 38 million unpaid family caregivers provide was worth about $600 billion in 2021, according to AARP, which factored in an average of 18 hours of care per week at an average of $16.59 per hour. Women provide about 2.2 times more care than men, according to research distributed by the JAMA Network. 

2. Automate annuities in target-date funds 

Global investment firm BlackRock recently unveiled a target-date-fund program that automatically incorporates annuities into investors’ portfolios. Target-date funds are linked to when investors intend to retire, such as 2050 or 2065, and automatically adjust from more aggressive to more conservative investments as an individual ages. That means they typically start with portfolios that are highly exposed to stocks and slowly transition to a mixture of stocks and bonds. 

The new product, called LifePath Paycheck, allots a portion of a target-date fund to vetted insurance products, beginning with 10% at age 55. By age 65, the fund will be 70% allocated in investments, and 30% can be annuitized, if the individual chooses. This setup will give retirees a “license to spend,” as they’ll get retirement income from the annuity investments that is similar to a worker receiving a paycheck, Jason Fichtner, chief economist at the Bipartisan Policy Center, said at a BlackRock media event announcing the product. 

The decumulation phase of a 401(k) is not quite as simple as the accumulation phase, for which systems are in place to automatically enroll workers or increase their contributions, Kathleen Kelly, founding and managing partner of Compass Financial Partners, said at the same event. “Plan participants need to be an accountant, investment manager and actuary” when it comes to drawing funds from their accounts, she said. Having annuities within the asset allocation of a target-date fund will continue the “do it for me” approach many retirement investors rely on through their workplace plans, she said. 

Automation is a powerful tool for retirement savers, as exemplified by auto-enrollment, in which companies automatically place their workers into an employer-sponsored plan like the 401(k), with workers having to opt out of the plan rather than making t hem opt in. Auto-enrollment has been cited as helping retirement savers put away billions of dollars for their future security. 

3. Expand guaranteed-income options within defined-contribution plans 

Legislators expanded access to annuities in 401(k) plans through Secure 2.0, but workers would benefit from a larger universe of options, Hopkins said. There are many more guaranteed-income products available outside of 401(k) plans than within them, and having a centralized marketplace could make the process simpler to navigate and more affordable. It would work in a similar way as a trade request for an investment, but instead of putting money toward an order for a stock, that money would be contributed toward the premium for a deferred-income product. 

Getting everyone on board with having annuities as part of retirement plans has been difficult. Plan sponsors have been hesitant, and even once such a system is adopted, companies would have to convince plan participants to use the option. Participants might worry about the solvency of insurers behind these products, while employers might stress about the regulations for the products they use. Critics of the Department of Labor’s latest fiduciary rule, announced in April, say more stringent regulation of commission-based products, including insurance and guaranteed-income products, will make these types of investments even harder to come by. 

Before a marketplace could be viable, companies would have to get comfortable with offering more than one type of in-plan annuity product, said Wade Pfau, professor of retirement income at the American College of Financial Services. “That situation will last for quite a while before there is any strong movement of having a broader list,” he said. 

4. Forbid preretirement withdrawals 

Retirement savers would be better served if they were not able to access the funds in their 401(k) plans prior to retirement, said Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School. Social Security and pensions, which are known as defined-benefit plans, do not allow workers to draw down assets prior to retirement. 

There is currently a “leakage” problem in 401(k) plans. Leakage occurs when retirement assets are taken out of accounts prior to retirement for nonretirement-related reasons. According to the Employee Benefit Research Institute, there are four types of withdrawals: cash-outs, when money is withdrawn after a job change without being rolled into another type of retirement account; hardship withdrawals, when assets are used to pay for an emergency; loan defaults, which happen when a worker who borrowed savings from a workplace plan does not return the assets in time; and delays in initial plan participation, even if a worker is eligible to participate. 

Cash-outs are a big part of the problem, because workers face hurdles in rolling over their savings from one type of plan to another when they change jobs. They may need to submit extensive paperwork or navigate communication between the two investment firms. Some retirement savers may opt to simply take the money out without making a qualified transfer to another plan or IRA, which not only affects their investment prospects but also subjects them to taxes and penalties. 

Such lump-sum distributions account for losses of defined-contribution assets totaling between $60 billion and $105 billion every year, according to a 2019 study from the Savings Preservation Working Group. 

The account balance matters in these instances, too. For example, some companies have rules that say an account with a low balance — such as under $5,000 — must be cashed out. 

A consortium of large 401(k) plan administrators — including TIAA, Fidelity Investments, Vanguard and Principal — announced in November that they had launched a program that would keep plan participants’ investments intact, even if they change jobs. Through the Portability Services Network, workers will be able to move money more efficiently between 401(k) plans or other similar workplace plans, including 403(b) and 457 accounts, when they change jobs while having account balances below $7,000. “The automation of this process will help reduce the leakage of assets from the U.S. retirement system stemming from premature cash-outs of accounts and preserve trillions of dollars in savings, which is particularly beneficial for communities of color, women, and low-income workers,” the consortium said in a statement at the time of its announcement. 

5. Make plans available to more people 

Perhaps one of the 401(k) plan’s biggest issues is that it’s not available to all workers. States are trying to solve that problem by creating their own programs, often known as auto-IRA plans. 

With state-run auto-IRA plans, companies can — or in some states, must — offer employees a workplace retirement benefit. This is set up like a 401(k), with contributions made through payroll, but looks more like an IRA, with lower contribution limits. In 2024, IRA owners can contribute up to $7,000 a year, with an additional $1,000 catch-up contribution if they’re 50 or older. In comparison, 401(k) plan participants can contribute $23,000 in 2024, with an additional $7,500 if they’re 50 or older. 

Even when workers do have access to a 401(k), not everyone takes advantage of it. The Bureau of Labor Statistics, for instance, found that while two out of three people had access to a defined-contribution plan, slightly fewer than half of those with access to such a plan participated in it. 

Coverage is the “biggest problem,” said Alicia Munnell, director of the Center for Retirement Research at Boston College, but it is often linked to the individual company. Expanding coverage might involve some sort of federal mandate, she said, adding,  “People with 401(k)s are the lucky ones.”

401(k) Plan Research: FAQs

Frequently asked questions about 401(k) plan research, how large are 401(k)s.

As of June 30, 2021, 401(k) plans held an estimated $7.3 trillion in assets and represented nearly one-fifth of the $37.2 trillion US retirement market, which includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private- and public-sector employers), individual retirement accounts (IRAs), and annuities. In comparison, 401(k) assets were $3.1 trillion and represented 17 percent of the US retirement market in 2011.

401(k) Plan Assets Billions of dollars, end-of-period, selected periods

See Investment Company Institute, “ The US Retirement Market, Second Quarter 2021 .”

Note: Components may not add to the total because of rounding.

Sources: Investment Company Institute and Department of Labor

How many Americans have 401(k)s?

In 2020, there were about 600,000 401(k) plans, with about 60 million active participants and millions of former employees and retirees.

How did 401(k) participants fare through the financial crisis and economic recession?

401(k) participants generally stayed the course through the financial crisis and economic recession. An  examination of account records  of more than 22 million DC plan participants found that in 2008, only 3.7 percent of participants stopped contributing to their accounts. In addition, most participants maintained their asset allocations, with 14.4 percent changing the asset allocation of their account balances and 12.4 percent changing their contribution investment mix. These activities have become even less prevalent since 2008. For example,  an analysis of more than 30 million DC accounts  in 2021 found that 1.1 percent of participants stopped contributing, 7.3 percent changed the asset allocation of their account balances, and 4.5 percent changed the asset allocation of contributions.

Analysis of workers with consistent participation in 401(k) plans finds that 401(k) accounts accumulate significant assets. According to research released as part of the Employee Benefit Research Institute (EBRI) and ICI Participant-Directed Retirement Plan Data Collection Project, the largest database on participants in 401(k) plans, the average account balance of 401(k) participants with consistent participation from year-end 2010 through year-end 2018 increased at a compound annual average growth of 13.9 percent over that six-year period.

What role do mutual funds play in 401(k) plan investing?

About  66 percent of 401(k) plan assets  were held in mutual funds as of the end of June 2021. The remaining 401(k) plan assets include company stock (stock of the employer), individual stocks and bonds, guaranteed investment contracts (GICs), bank collective trusts, life insurance separate accounts, and other pooled investment products.

What role do retirement account investments play in the mutual fund industry?

Mutual fund assets held in retirement accounts (IRAs and DC plan accounts, including 401(k) plans) were $12.1 trillion as of the end of June 2021, or 47 percent of overall mutual fund assets. Fund assets in 401(k) plans stood at $4.8 trillion, or 19 percent of total mutual fund assets as of June 30, 2021. Retirement savings accounts held a little more than half of long-term mutual fund assets industrywide but a much smaller share of money market fund assets industrywide (12 percent).

What is the average 401(k) plan account balance?

When looking at 401(k) account balances it is important to account for participant age and tenure. Account balances tended to be higher the longer 401(k) plan participants had been working for their current employers and the older the participant. In the EBRI/ICI 401(k) database, at year-end 2018, participants in their forties with more than two to five years of tenure had an average 401(k) plan account balance of about $36,000, compared with an average 401(k) plan account balance of more than $306,000 among participants in their sixties with more than 30 years of tenure. The median 401(k) plan participant was 46 years old at year-end 2018, and the median job tenure was six years.

401(k) Plan Account Balances Increase with Participant Age and Job Tenure Average 401(k) plan account balance by participant age and tenure, 2018

The tenure variable is generally years working at current employer, and thus may overstate years of participation in the 401(k) plan.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “ 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2018 .”

How have 401(k) participants allocated their investments?

On average, 401(k) participants had 63 percent of their 401(k) plan balances invested directly or indirectly in equity securities at year-end 2018 in the EBRI/ICI 401(k) database. That consisted of equity funds, including mutual funds and other pooled investments (39 percent of account balances), employer’s company stock (5 percent), and the equity portion of balanced funds (20 percent). Eight percent of account balances was invested in bond funds, 2 percent in money market funds, 6 percent in guaranteed investment contracts (GICs) and other stable value funds, and 12 percent in the fixed-income portion of balanced funds.

Average Asset Allocation of 401(k) Plan Accounts Percentage of account balances, 2018

Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Percentages are dollar-weighted averages. Components do not add to 100 percent because of rounding.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “ 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2018 ."

Does age affect a 401(k) participant’s asset allocation?

The asset allocation of participant account balances varies considerably with the age of the 401(k) participant. Younger participants invest more in equities and older participants tend to invest more in fixed-income securities such as bond funds, money market funds, stable value funds, or GICs. At year-end 2018, on average, participants in the EBRI/ICI 401(k) database in their twenties had 74 percent of their 401(k) assets invested in equities (equity funds, company stock, and the equity portion of balanced funds) while participants in their sixties had 52 percent of their 401(k) assets invested in equities.

401(k) account portfolio allocation also varies widely within age groups. At year-end 2018, 75 percent of 401(k) participants in their twenties held more than 80 percent of their account in equities, and about 13 percent held 20 percent or less. Of 401(k) participants in their sixties, 14 percent held more than 80 percent of their account in equities, and 16 percent held 20 percent or less.

Asset Allocation to Equities Varied Widely Among 401(k) Plan Participants Asset allocation distribution of 401(k) participant account balance to equities, percentage of participants, year-end 2018

Note: Equities include equity funds, company stock, and the equity portion of balanced funds. Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product invested primarily in the security indicated.  

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See  ICI Research Perspective , “ 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2018 .”

How many participants borrow against their 401(k)s?

Although most 401(k) participants have access to loans from their plans, most 401(k) plan participants do not borrow against their balances. The EBRI/ICI 401(k) database reveals that about 53 percent of 401(k) participants were in plans that offered a loan option in 2018, and only 17 percent of those eligible for loans had loans outstanding.

What is the average outstanding loan balance through 401(k) plans?

For those with outstanding loans at the end of 2018, the average unpaid loan balance was $8,162. This represents about 10 percent of the participant’s remaining account balance. Loan ratios (outstanding loan balance as a percentage of the remaining account balance) were higher for participants in their twenties (24 percent) and thirties (17 percent) and lower for participants in their fifties (8 percent) and sixties (7 percent).

Additional 401(k) Resources

Please visit our 401(k) resource center and our defined contribution plan publication page .

October 2021

Was the 401(k) a Mistake?

How an obscure, 45-year-old tax change transformed retirement and left so many Americans out in the cold.

Credit... Illustration by Tim Enthoven

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By Michael Steinberger

Michael Steinberger is a contributing writer for the magazine. He writes periodically about the economy and the markets.

• May 8, 2024

Jen Forbus turned 50 this year. She is in good health and says her life has only gotten better as she has grown older. Forbus resides in Lorain, Ohio, not far from Cleveland; she is single and has no children, but her parents and sisters are nearby. She works, remotely, as an editorial supervisor for an educational publishing company, a job that she loves. She is on track to pay off her mortgage in the next 10 years, and having recently made her last car payment, she is otherwise debt-free. By almost any measure, Forbus is middle class.

Listen to this article, read by Malcolm Hillgartner

Still, she worries about her future. Forbus would like to stop working when she is 65. She has no big retirement dreams — she is not planning to move to Florida or to take extravagant vacations. She hopes to spend her later years enjoying family and friends and pursuing different hobbies. But she knows that she hasn’t set aside enough money to ensure that she can realize even this modest ambition.

A former high school teacher, Forbus says she has around $200,000 in total savings. She earns a high five-figure salary and contributes 9 percent of it to the 401(k) plan that she has through her employer. The company also makes a matching contribution that is equivalent to 5 percent of her salary. A widely accepted rule of thumb among personal-finance experts is that your retirement income needs to be close to 80 percent of what you earned before retiring if you hope to maintain your lifestyle. Forbus figures that she can retire comfortably on around $1 million, although if her house is paid off, she might be able to get by with a bit less. She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.

But even if the stock market delivers blockbuster returns over the next 15 years, her goal is going to be difficult to reach — and this assumes that she doesn’t have a catastrophic setback, like losing her job or suffering a debilitating illness.

She also knows that markets don’t always go up. During the 2008 global financial crisis, her 401(k) lost a third of its value, which was a scarring experience. From the extensive research that she has done, Forbus has become a fairly savvy investor; she’s familiar with all of the major funds and has 60 percent of her money in stocks and the rest in fixed income, which is generally the recommended ratio for people who are some years away from retiring. Still, Forbus would prefer that her retirement prospects weren’t so dependent on her own investing acumen. “It makes me very nervous,” she concedes. She and her friends speak with envy of the pensions that their parents and grandparents had. “I wish that were an option for us,” she says.

The sentiment is understandable. With pensions, otherwise known as defined-benefit plans, your employer invests on your behalf, and you are promised a fixed monthly income upon retirement. With 401(k)s, which are named after a section of the tax code, you choose from investment options that your company gives you, and there is no guarantee of what you will get back, only limits on what you can put in. This is why they are known as defined-contribution plans. Pensions still exist but mainly for unionized jobs. In the private sector, they have largely been replaced by 401(k)s, which came along in the early 1980s. Generally, contributions to 401(k)s are pretax dollars — you pay income tax when you withdraw the money — and these savings vehicles have been a bonanza for a lot of Americans.

Not all companies offer 401(k)s, however, and millions of private-sector employees lack access to workplace retirement plans. Availability is just one problem; contributing is another. Many people who have 401(k)s put little if any money into their accounts. With Americans now aging out of the work force in record numbers — according to the Alliance for Lifetime Income, a nonprofit founded by a group of financial-services companies, 4.1 million people will turn 65 this year, part of what the AARP and others have called the “silver tsunami” — the holes in the retirement system are becoming starkly apparent. U.S. Census Bureau data indicates that in 2017 49 percent of Americans ages 55 to 66 had “no personal retirement savings.”

The savings shortfall is no surprise to Teresa Ghilarducci, an economist at the New School in New York. She has long predicted that the shift to 401(k)s would leave vast numbers of Americans without enough money to retire on, reducing many of them to poverty or forcing them to continue working into their late 60s and beyond. That so many people still do not have 401(k)s or find themselves, like Jen Forbus, in such tenuous circumstances when they do, is proof that what she refers to as this “40-year experiment with do-it-yourself pensions” has been “an utter failure.”

It certainly appears to be failing a large segment of the working population, and while Ghilarducci has been making that case for years, more and more people are now coming around to her view. Her latest book, “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” which was published in March, is drawing a lot of attention: She has been interviewed on NPR and C-SPAN and has testified on Capitol Hill.

It is no longer just fellow progressives who are receptive to her message. Ghilarducci used to be an object of scorn on the right, once drawing the megaphonic wrath of Rush Limbaugh. Today, though, even some conservatives admit that her assessment of the retirement system is basically correct. Indeed, Kevin Hassett, who was a senior economic adviser to President Trump, teamed up with Ghilarducci not long ago to devise a plan that would help low- and middle-income Americans save more for retirement. Their proposal is the basis for legislation currently before Congress.

And Ghilarducci recently found her critique being echoed by one of the most powerful figures on Wall Street. In his annual letter to investors, Larry Fink , the chairman and chief executive of BlackRock, one of the world’s largest asset-management companies, wrote that the United States was facing a retirement crisis due in no small part to self-directed retirement financing. Fink said that for most Americans, replacing defined-benefit plans with defined-contribution plans had been “a shift from financial certainty to financial uncertainty” and suggested that it was time to abandon the “you’re on your own” approach.

While that isn’t likely to happen anytime soon, it seems fair to ask whether the country as a whole has been well served by the 401(k) revolution. The main beneficiaries have been higher-income workers; instead of making an economically secure retirement possible for more people, 401(k)s have arguably become another driver of the inequality that is a defining feature of American life.

When it comes to generating wealth, 401(k)s have been an extraordinary success. The Investment Company Institute, a financial-industry trade group, calculates that the roughly 700,000 401(k) plans now in existence hold more than $7 trillion in assets. But the gains have gone primarily to those who were already at or near the top. According to the Federal Reserve, the value of the median retirement-saving account for households in the 90th to 100th income percentile has more than quintupled during the last 30 years and is currently more than $500,000. In one sense, it is not surprising that the affluent have profited to this degree from 401(k)s: The more money you can invest, the more money you stand to make.

In 2024, annual pretax contributions for employees are capped at $23,000, but with an employer match and possibly also an after-tax contribution (which is permitted under some plans), the maximum can reach $69,000. Workers 50 and over are also allowed to kick in an additional $7,500, potentially pushing the total to $76,500. Needless to say, only a sliver of the U.S. work force can contribute anything like that to their 401(k)s.

The withdrawal rules have evolved in a way that also favors high earners. You are generally not supposed to begin taking money from a 401(k) before you are 59½; doing so could incur a 10 percent penalty (on top of the income-tax hit). What’s more, you can now put off withdrawing money until age 73; previously, you had to begin drawing down 401(k)s by 70½. Those extra years are an added tax benefit for retirees who are in no rush to tap their 401(k)s.

People in lower-income brackets may have also made money from 401(k)s but hardly enough to retire on with Social Security. In 2022, the median retirement account for households in the 20th through 39th percentile held just $20,000. For this segment of the working population, 401(k)s sometimes end up serving a very different purpose. They become a source of emergency funds, not retirement income. But then, for many of these people, retirement seems like an impossibility.

Laura Gendreau directs a program called Stand by Me, a joint venture between the United Way of Delaware and the state government that provides free financial counseling. She says that when she asks clients if they are putting aside any money for retirement, they often look at her in disbelief: “They say, ‘How do you expect me to save for retirement when I’m living paycheck to paycheck?’” She and her colleagues try to identify expenditures that can be eliminated or reduced so that people can start saving at least a small portion of what they earn. But she says that some clients are having such a hard time just getting by that they can’t fathom being able to retire. Sometimes it does not even occur to them to look into whether their employers offer 401(k)s. “They have no idea,” Gendreau says.

Ghilarducci has been hearing this sort of thing for years. Her career in academia began around the time that 401(k)s first emerged, and from the start, she regarded these savings plans with skepticism. For one thing, she feared that a lot of people would never have access to them. But she also felt that 401(k)s were unsuitable for lower-income Americans, who often struggled to save money or who might not have either the time or the knowledge to manage their own investments. In her judgment, the offloading of retirement risk onto workers was worse than just an economic misstep — it represented a betrayal of the social contract.

Ghilarducci, who is 66, has the unusual distinction of being a high school dropout with a Ph.D. in economics. She also has firsthand experience of economic hardship, and her working-class roots have shaped her worldview. She was raised by a single mother in Roseville, Calif., and money was always tight. Despite a turbulent home life, she excelled academically and was able to take advantage of a program that allowed California students with strong grades and test scores to attend schools within the California university system without charge.

After being accepted at the University of California, San Diego, she stopped going to high school — it bored her — and never graduated. A year later, she transferred to the University of California, Berkeley. Neither university knew that she had not completed high school. “They didn’t ask, and I didn’t tell,” she says with a laugh. She majored in economics at Berkeley and also obtained her doctorate there. She then taught at the University of Notre Dame for 25 years (she joined the faculty of the New School in 2008). During that time, she acquired a national reputation for her expertise on retirement.

In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation. Her plan drew the wrath of voices on the right — the conservative pundit James Pethokoukis called her “the most dangerous woman in America.”

But her timing proved to be apt: That year, the global financial crisis imperiled the retirement plans of millions of Americans. Ghilarducci suggested that if the government was going to bail out the banks, it also had an obligation to help people whose 401(k)s had tanked. Her idea inflamed the right: Rush Limbaugh attacked her during his daily radio show, which brought her a wave of hate mail.

Her hostility to 401(k)s is partly anchored in a belief that when it comes to retirement, the country was on a better path in the past. In the 1950s and 1960s, many Americans could count on pensions and Social Security to provide them with a decent retirement. It was a different era, of course — back then, men (and it was almost always men) often spent their entire careers with the same companies. And even at their peak, pensions were not available to everyone; only around half of all employees ever had one. Still, in Ghilarducci’s view, it was a time when the United States put more emphasis on the interests of working-class Americans, including ensuring that they could retire with some degree of economic security.

She portrays the move to defined contribution retirement plans as part of the sharp rightward turn that the United States took under President Ronald Reagan, when the notion of individual responsibility became economic dogma — what the Yale University political scientist Jacob Hacker has called “the great risk shift.” The downside of this shift was laid bare by the great recession. Many older Americans lost their savings and were forced to scavenge for work.

This was the subject of the journalist Jessica Bruder’s book “Nomadland,” for which Ghilarducci was interviewed and that was the basis for the Oscar-winning film of the same title. To Ghilarducci, the portraits in “Nomadland” — of lives upended, of the indignity of being old and having to scramble for food and shelter — presaged the insecure future that awaited millions of other older Americans. And Ghilarducci believes that with record numbers of people now reaching retirement age, that grim future is arriving.

Her new book makes a powerful case for why all working people deserve a comfortable, dignified retirement and why, for so many Americans, the current retirement system is incapable of providing that. Her nationwide book tour has had the feel of a victory lap, although the vindication she can plausibly claim is no cause for celebration. “It’s the pinnacle of my career because what I told people would happen is happening,” she says. “So it’s a big told-you-so, and that told-you-so is on the backs of around 40 million middle-class workers who will be poor or near-poor elders.”

Ghilarducci finds it outrageous that Americans who don’t have enough money set aside for retirement are now being told that the solution to their financial woes is to just keep working. Forcing senior citizens to stay on the job is cruel, she says, and especially so if it involves physically demanding labor. She has observed that older workers often have “a shame hunch” — their body language suggests embarrassment. They are spending their last years in quiet humiliation.

To Ghilarducci, all of this represents a retreat from the ideals that fueled America’s prosperity and made the United States a beacon of opportunity. As she writes in her book, “A signature achievement of the postwar period — the democratization of who has control over the pace and content of their time after a lifetime of work — is being reversed.”

Back in the 1960s and 1970s, many companies, in addition to providing their employees with pensions, offered tax-deferred profit-sharing programs, which were available mostly to executives. But there was a lot of murkiness surrounding these defined-contribution plans — and a lot of concern that the I.R.S. might eventually ban them. When Congress passed the Revenue Act of 1978, it included an addition to the Internal Revenue Code that was intended to provide greater clarity about how these plans were to be structured and who could participate. The provision, which took effect in 1980, was called Section 401(k). According to a 2014 Bloomberg article, the staff members who drafted it thought it was a minor regulatory tweak, of no particular consequence. One former senior congressional aide was quoted as saying it was “an insignificant provision in a very large bill. It took on a life of its own afterwards.”

That’s because Ted Benna saw something in that new section of the Internal Revenue Code that had eluded the people who wrote it. Benna, a retirement-benefits consultant, was in his suburban Philadelphia office on a Saturday afternoon in 1979, trying to figure out how to devise a deferred-compensation plan for one of his firm’s clients, a local bank. At the time, the top marginal tax rate was 70 percent, and the bank wanted to see if there was a way to award bonuses to its executives that could limit their tax bill.

As Benna read the provisions of section 401(k), a solution dawned on him: The language seemed to indicate that he could create a plan in which the bonuses were put in a tax-deferred retirement plan. There was a catch, though. Under the terms of 401(k), this could be done only if rank-and-file employees participated in the plan. Benna knew that getting them to agree to set aside some of their pay would not be easy, so he came up with a sweetener — he proposed that the bank would partly match the contributions of its employees.

The bank balked at Benna’s proposal; it was concerned that regulators would rule the scheme illegal. Benna’s own firm decided to implement the idea, however, and it proved wildly popular with the company’s 50 or so employees. Benna and his colleagues called the plan “cash-op,” but the name never caught on, and instead came to be known as the 401(k). The new savings vehicle eventually did run into government resistance, when the Reagan administration, concerned about the lost tax revenues, tried to eliminate 401(k)s in 1986 — this notwithstanding the fact that 401(k)s, with their promise of individual empowerment, seemed emblematic of the so-called Reagan Revolution. But by then it was too late. A number of companies were already offering 401(k)s to their employees, and the financial industry, eyeing a lucrative new revenue stream, threw its lobbying muscle behind these investment plans.

Benna is 82 now, and I recently met with him in York, Pa. (He was there visiting family; he lives near Williamsport, Pa.) He is still working. He told me that his religious faith had compelled him to put off his own retirement. “The Creator didn’t create us to spend 30 years doing nothing,” he said. A tall, unassuming man, Benna suggested that we meet at the Cracker Barrel in York. There, over iced tea and coffee, we talked about the trillion-dollar business that resulted from his close reading of section 401(k). Benna had been quoted in the past voicing some misgivings about these savings plans. He told the magazine Smart Money in 2011, for instance, that he had given rise to a “monster.”

But he explained to me that the remorse he expressed had nothing to do with 401(k)s themselves, which he said had helped convert millions of Americans from “spenders into savers.” Rather, what he regretted was the complexity of many plans — he thought a lot of employees were overwhelmed by all the investment options — and the fact that the financial-services industry profited from them to the degree that it did. Benna said that the advent of the 401(k) turned the mutual-fund industry into the colossus that it is today and that too many fund managers charged what he considers unjustifiably high fees. “Over the life of an investment, it is a real hit — it is gigantic,” he says.

Yet Benna rejects the idea that 401(k)s took the country in the wrong direction. He contends that traditional pensions were doomed with or without 401(k)s. He recalls visiting Bethlehem Steel in the 1980s to talk about 401(k)s. “I told them that they had to start helping their employees save for retirement, and their H.R. person said, ‘Our employees don’t need to do that because we take care of them for life.’ And what happened to that?” (Bethlehem Steel filed for bankruptcy in 2001, and the government had to fulfill its pension obligations.) Likewise, he doesn’t think it is true that 401(k)s have really only benefited the well-off. He mentioned his brother-in-law, who lived in York and worked as a supervisor at Caterpillar, the construction-equipment manufacturer. When Caterpillar announced in 1996 that it was relocating its York plant to Illinois, he chose to take early retirement rather than uproot his family. “He told me that was only possible because of his 401(k),” Benna said. But he conceded that too many people are being let down by the retirement system and that something needs to be done to help them save for their later years.

Benna is one of a number of experts who believe that mandates will ultimately be needed to improve retirement financing — that the voluntary approach, in which companies decide whether they want to sponsor 401(k)s and employees decide whether they wish to participate, is leaving too many gaps. He thinks all companies above a certain size should have to offer employees 401(k)s or alternative retirement-savings options. (Starting next year, employers that establish new 401(k) plans will be required to automatically enroll workers in those plans. There is still no obligation, however, to actually provide the plans themselves.)

Other countries go further. Australia’s Superannuation Guarantee requires companies to contribute the equivalent of 11 percent of an employee’s monthly pay to an investment account that is controlled by the worker, who can also put in additional money. The “Super,” as it is known, includes full-time and part-time workers and has proved to be enormously successful. With its relatively small population — just 27 million — Australia now has the world’s fourth-highest per capita contributions to a pension system, and almost 80 percent of its work force is covered. BlackRock’s Larry Fink says that “Australia’s experience with Supers could be a good model for American policymakers to study and build on.”

The desire to give less affluent Americans the chance to build a decent nest egg is one that is shared across ideological lines. That in itself is a big change from, say, the debate about health care reform, which bitterly divided liberals and conservatives. (It is worth recalling that the Affordable Care Act was enacted in 2010 without a single Republican vote.) In fact, concern about the retirement-savings shortfall has become a rare source of bipartisan cooperation in Washington, and it has also yielded some unlikely alliances.

A few years ago, Kevin Hassett, who was chairman of the White House’s Council of Economic Advisers for a portion of Donald Trump’s presidency, became familiar with Ghilarducci’s work and sent her, unsolicited, the draft of a paper he was writing about the retirement-savings gap. She replied enthusiastically, and he suggested that she write the paper with him. Their partnership eventually yielded a plan for helping lower- and middle-income Americans save for retirement.

The idea they hatched was to make the Thrift Savings Plan, a government-sponsored retirement program for federal employees and members of the uniformed services, open to all Americans. T.S.P., which in total assets is the largest defined-contribution program in the country, includes automatic enrollment and matching contributions from the government. A number of states now offer retirement-savings plans for people whose employers don’t provide 401(k)s, but none of these include matching contributions, which many experts believe are an important incentive for getting workers to set aside a portion of their own salaries.

Ghilarducci and Hassett think that only a federal program in which savings accounts of eligible workers are topped up with government money will significantly increase the participation and savings rates of low-income Americans. Their proposal is the basis for the Retirement Savings for Americans Act, a bill recently introduced by the U.S. senators John Hickenlooper and Thom Tillis and the U.S. representatives Terri Sewell and Lloyd Smucker. Two are Democrats; two are Republicans.

This past January, another bipartisan collaboration — between Alicia Munnell, who was an economist in the Clinton administration and who now serves as the director of Boston College’s Center for Retirement Research, and Andrew Biggs, a senior fellow at the American Enterprise Institute, a conservative think tank — published a paper calling for a reduction or an end to the 401(k) tax benefit.

Their research showed that it had not led to more participation in the program nor had it significantly increased the amount that Americans in the aggregate were saving for retirement. It was mostly just a giveaway to upper-income investors and a costly one at that. They estimated that it deprived the Treasury of almost $200 billion in revenue annually. They proposed reducing or even ending the tax-deferred status of 401(k)s and using the added revenue to shore up Social Security.

When I spoke to Biggs, he emphasized that he was not against 401(k)s. On balance, he thinks that they have worked well, and he also says that some of the criticism aimed at them is no longer valid. For instance, the do-it-yourself aspect is overstated: Most plans, for instance, now offer target-date funds, which automatically adjust your asset allocation depending on your age and goals, freeing you from having to continuously readjust your portfolio yourself. He acknowledges that rescinding the tax preferences could be tricky politically: The people who have chiefly benefited from them are also the people who write checks to campaigns. But he is confident that Americans can ultimately be persuaded to give up the tax advantages. “If we say to people, ‘Look, we can slash your Social Security benefits or increase your Social Security taxes, or we can reduce this useless subsidy that goes to rich people who don’t need the money’ — well, that’s a little more compelling.”

Hassett told me that his work with Ghilarducci does not represent any softening of his faith in the free market. Quite the opposite: He sees government intervention to boost retirement savings as a necessary step to preserving American capitalism. Hassett has been concerned for some time that the country is drifting toward socialism — the subject of his most recent book — and part of the reason is that too many Americans are economically marginalized and have come to feel that the system doesn’t work to their benefit.

“They feel disconnected, and they are disconnected,” Hassett says. Having the government help them save for retirement would be prudent. “It would give them more of a stake in the success of the free-enterprise system,” he says. “I think it’s important for long-run political stability that everybody gets a stake.”

Jen Forbus is not economically marginalized, but many in her community struggle. Lorain, a city of about 65,000 on the shore of Lake Erie, has never recovered from the loss of a Ford assembly plant and two steel plants. Around 28 percent of Lorain’s residents now live in poverty. By the grim standards of her area, Forbus is doing well. “I’m definitely privileged,” she says. Even so, she knows that despite her diligent saving and careful budgeting, there is a good chance that she will not be able to retire at 65. She dreads the prospect of having to remain in the labor market as an elderly person. “Something like waitressing — past a certain age, that’s really difficult,” she says. And she admits that she finds it jarring that even for someone like her, retirement may be an unachievable objective. “I do feel our system fails too many people,” she says.

Read by Malcolm Hillgartner

Narration produced by Tanya Pérez

Engineered by Steven Szczesniak

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Retirement Plan Notices: Current Experiences and Opportunities for Improvement

S. Kathi Brown, AARP Research

Employer-sponsored retirement plans, including 401(k) plans, similar individual retirement savings plans, and traditional pension plans, are among the primary vehicles through which workers in the U.S. save for retirement. People who participate in these retirement plans receive important notices or statements about their plans that show participants their account balance or how well funded the plan is, communication about changes to the investments, year-end documents provided for tax purposes, and various other documents.

In March 2024, we surveyed 595 adults age 50 or over who have a retirement savings plan or pension from a current or former employer in order to learn what they think of their retirement plan notices, how they access them, what plan information is most important to them, and how they think plan notices could be improved. We also asked some questions designed to examine understanding of plan fees and their impact on retirement investments.

Most report at least some understanding of their plan notices, but many lack basic knowledge about fees.

Fewer than half (45%) of adults 50-plus who have employer-sponsored retirement plans say that they completely understand the notices they receive from their plans, while nearly as many (43%) say they somewhat understand them. Another 12% understand them just a little or not at all.

Importantly, the survey reveals a lack of awareness of fees charged by plans, as well as a desire for more information about fees. All retirement plans charge fees, such as fees for managing the plan as a whole and fees for managing the plan’s investments. In spite of this, when asked to describe their understanding of the fees that they pay in their retirement plan, 40% of participants 50-plus in all types of retirement plans say that they don’t pay fees on their retirement plan, and another 16% say that they have never thought about this. Just 27% say that they understand the fees and know where to find information about them.

Fees are especially relevant to participants in 401(k)-type retirement savings plans, as participants in these types of plans typically can choose from a selection of available investments and may switch to investments with lower fees if desired. However, while all 401(k)-type plans charge plan participants fees, even among participants in 401(k)-type plans, roughly one in four (24%) think that they don’t pay fees in their retirement plan and another 18% say that they have never thought about fees. Only one in three (34%) 401(k)-type plan participants 50-plus say that they understand their plan fees and know where to find fee-related information.

Furthermore, the survey suggests that many respondents are unable to make basic fee calculations that would enable them to assess the impact of these fees on their retirement investments. When presented with an explanation of retirement plan fees for a hypothetical retirement plan, many respondents were unable to correctly calculate the total fees that a participant in the hypothetical plan would pay. Specifically, in one exercise, just 54% of respondents correctly calculated the fees, while in another exercise just 64% of respondents correctly calculated the fees.

Fees can have a significant impact on account balances.

Plan participants’ lack of knowledge about fees may lead participants to choose plan investments that they may not have chosen if they had better understood the potential long-term impact of these fees. For example, according to an investment fees calculator developed by The Pew Charitable Trusts, a retirement saver who starts contributing $175 every two weeks to a retirement plan early in their career, with an average rate of return of 6% and annual fees of just 0.05% will end up with over $300,000 more in total retirement savings after 40 years than if they had been charged annual fees of 2.05%. This will directly impact standard of living in retirement, and may mean the difference between retiring when planned, or working several additional years. It is therefore very important that retirement investors understand what the fees are in a retirement plan and how those fees impact their account balances.

Updates about account balances and how much income to expect in retirement are deemed especially important.

Most respondents say that it is very important to them to receive regular updates about their account balance and about how much income they can expect to receive in retirement. Many also say that regular updates about performance, investment mix, and fees are very important:

• Account balance, including each investment balance (64%)
• How much income you can expect to receive per year in retirement from your account balance (58%)
• How the performance of your investments compares to other investments (45%)
• Whether your investment mix is appropriate for your age (42%)
• How fees affect your investment returns (42%)
• How fees for your investments compare to fees for other available investments (37%)

Many would value a phone number to call with questions and an upfront summary of key points.

When asked how their retirement plan notices could be improved, nearly half (48%) of retirement plan participants 50 or over say that it would be helpful for notices to include a phone number for participants to call if they have questions. Nearly as many say that the following would also be helpful: an upfront summary of key points (43%), an online resource center (40%), and simplified language (39%).

Methodology

Interviews were conducted from March 14–18, 2024 using the Foresight 50+ Omnibus. The final sample includes 595 U.S. adults 50-plus who have either an employer-sponsored retirement savings plan or an employer-funded traditional pension plan from a current or former employer. Funded and operated by NORC at the University of Chicago, Foresight 50+ is a probability-based panel designed to be representative of the U.S. household population age 50 or older. Interviews were conducted online and via phone. All data are weighted by age, sex, education, race/ethnicity, region, and AARP membership.

For more information, contact S. Kathi Brown in AARP Research at [email protected] . Media inquiries should be directed to [email protected] .

Suggested citation:

Brown, S. Kathi.  Retirement Plan Notices: Views of Adults 50+: Annotated Questionnaire.  Washington, DC: AARP Research, May 2024. https://doi.org/10.26419/res.00803.001

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Detailed Findings

Retirement Plan Notices: Views of Adults 50+: Annotated Questionnaire

News Release

Brightscope/ici data show 401(k) plans offering wide array of diversified and cost-effective investment options.

Washington, DC; September 28, 2023 —Employers play a significant role in designing diverse investment lineups in 401(k) plans, according to an updated study from BrightScope, an ISS Market Intelligence business, and the Investment Company Institute (ICI). The study,  The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2020 , found that in 2020, the average large 401(k) plan offered 28 investment options, of which about 13 were equity funds, three were bond funds, and nine were target date funds.

“This study illustrates that employers recognize the importance of customizing investment menus of their 401(k) plans to suit their employees and promote saving and investing for retirement,” said Sarah Holden, ICI Senior Director of Retirement and Investor Research. “The wide range of investment options that employers offer allows investors to choose between a straightforward target date fund, or to personalize their asset allocation as they see fit.”

Between 2006 and 2020, large 401(k) plans added an average of six investment options to their plan lineups, going from 22 investment options on average in 2006 to 28 in 2020. Target date funds accounted for much of the net increase in investment options offered. In 2006, 32 percent of large 401(k) plans offered target date funds; this had risen to 87 percent of plans in 2020. Similarly, the percentage of participants who were offered target date funds increased from 42 percent of participants to 84 percent between 2006 and 2020, and the percentage of assets invested in target date funds increased from 3 percent to 28 percent.

Target Date Fund Offering and Use Have Risen in Large 401(k) Plans

* A target date fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name. Funds include mutual funds, collective investment trusts, separate accounts, and other pooled investment products.

Note: BrightScope audited 401(k) filings generally include plans with 100 participants or more. Plans with fewer than four investment options or more than 100 investment options are excluded from BrightScope audited 401(k) filings for this analysis. In 2020, the sample is 59,981 plans with 59.1 million participants and $5.9 trillion in assets.

Source: BrightScope Defined Contribution Plan Database

Notably, the report shows that average 401(k) total plan cost has decreased since 2009. In 2020, the average total plan cost was 0.83 percent of assets, down from 1.02 percent in 2009. The average participant was in a lower-cost plan, with a total plan cost of 0.51 percent of assets in 2020 (down from 0.65 percent in 2009), while the average dollar was invested in a plan with a total plan cost of 0.34 percent in 2020 (down from 0.47 percent in 2009). The total plan cost includes administrative, advice, and other fees from Form 5500 filings, as well as asset-based investment management fees.

“The decrease in 401(k) plan cost suggests that 401(k) plan sponsors and participants are paying attention to fees and expenses,” said Brooks Herman, Executive Director for Data & Research at ISS Market Intelligence, a unit of investment advisor Institutional Shareholder Services. “Falling investment management costs have contributed to the decline in total plan cost, including across the variety of mutual funds included in 401(k) plan lineups.”

Other key findings of the study include:

• Mutual funds accounted for at least half of the assets in all but the very largest plans, where a larger share of assets was held in CITs.
• Index funds, which tend to be equity index funds, generally have lower expense ratios than actively managed equity funds.
• Larger 401(k) plans are more likely to report that they automatically enroll workers into the plan . More than half of large 401(k) plans in the sample with more than $100 million in plan assets reported that they automatically enrolled their participants, and six in 10 plans with more than $1 billion in plan assets did.

About the Study

This report in The BrightScope/ICI Defined Contribution Plan Profile series focuses on private-sector 401(k) plans in 2020. This report first analyzes large 401(k) plans in the Department of Labor 2020 Form 5500 Research File. Focus then shifts to nearly 60,000 audited 401(k) plans in ISS Market Intelligence’s BrightScope Defined Contribution Plan Database, which have between four and 100 investment options and typically 100 participants or more. Private-sector 403(b) plans have been excluded from this analysis; for analysis of 403(b) plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), see T he BrightScope/ICI Defined Contribution Plan Profile: A Close Look at ERISA 403(b) Plans, 2019 (April 2023).

Complete results of the annual BrightScope/ICI study are posted on www.ici.org/research/retirement/dc-plan-profile . To learn more about ISS Market Intelligence, visit www.issmarketintelligence.com .

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