401(K) Plans: For Better or Worse
By Dan Ahl, AAMS™
Associate Portfolio Manager
These days our hopes and plans to retire are married to our 401(k) plans, for better or worse. This applies to everyone whose employer uses a 401(k), 403(b), 457 plan, or Thrift Savings Plan (TSP) as the benefits of each are very similar.
The shift from Pension Plans to the 401(k) began largely in the 1980’s due to regulation changes made by the government. The change permitted employees to use pre-tax funds to fund retirement plans(1). This resulted in employers seeing increased profits due to their decreased obligation to their employee’s retirement. The investment risk that results from markets fluctuating was now the responsibility of the employee. For decades employees joining a 401(k) plan had to “opt in” to participate and fund their retirement.
While many did, there were also many of us who chose not to partake. It wasn’t until December 29, 2022, when the Secure 2.0 was passed which required new 401(k) plans, effective as of January 1, 2025, to automatically enroll employees when they become eligible. As a result, plans with automatic enrollment are seeing a 94% participation rate compared to 67% for voluntary plans(2).
So how has the 401(k) faired throughout time? The results are quite mixed. As of Sept 30, 2024, the number of “401(k) millionaires” jumped to a record high of 497,0002. High income earners can take advantage of the higher contribution limits that 401(k) plans offer. According to Vanguard in 2022 14% of participants maxed out their employee contribution, which at the time was $20,500 annually. The IRS has since increased this number to $23,500 for 2025.
Despite this not all have enjoyed as much success with their plan. When looking at participants nearing retirement the median account balance was only $88,4882. Additionally, the number of participants seen taking a loan from their 401(k) has been on the rise, and when looking at all age categories, 40% of participants have balances less than $20,000.
Looking ahead our 401(k) plans aren’t going away any time soon. The new automatic enrollment requirement, so far, seems to be giving employees the nudge we need to begin saving. From there the responsibility falls to each of us to take control of our 401(k) and make sure we are on a path to success.
1 Institute of Financial Wellness – Understanding The Shift: Why Did Pensions Go Away and What’s Next for Retirees? – The Institute of Financial Wellness
2 CNBC – Your 401(k) is up, but a new report says Americans need to save more
