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Hope for 401(k) Savers?

Can the 401(k) evolve to provide retirement security, or is it a failed experiment? The point is hotly contested.

Two weeks ago, Sen. Tom Harkin (D., Iowa) proposed revamping the U.S. retirement system by replacing the 401(k) with a privately run retirement plan that would provide lifetime income benefits, similar to a pension.

Now, a new report from Fidelity Investments paints an optimistic picture of the 401(k)’s impact. On Aug. 2, Fidelity released an analysis of the 11.9 million 401(k) accounts it administers. Since 2009, the company says, the average employee contribution in the second quarter rose by $150, to $1,660. Employers, for their part, contributed an average of $950 in the second quarter, up $90 since 2009.

“Rising contribution levels from both employees and employers show a strong commitment that both have to workplace savings plans,” James McDonald, president of Workplace Investing for Fidelity, said in a prepared statement.

The firm said new trends among 401(k) plans have particularly helped members of Gen Y, born between 1979 and 1991. Among the 2.2 million Gen Y participants in plans Fidelity administers:

  • 51% have 100% of their money in a target-date fund, versus 30% of investors of all ages.
  • 8.8% contribute to a Roth 401(k), versus 5.8% of all participants.

Why are these trends positive? With a target-date fund, participants have “better diversified portfolios than previous generations, which can have a positive impact over the long term” on their returns, Fidelity says.

As for those who invest in Roth 401(k)s, they must contribute after-tax dollars. But once they retire, they withdraw the funds tax-free. For younger investors, this is typically a good deal. The reason: They are likely to be in a lower tax bracket when they make contributions than they will be in the future, when they make withdrawals.

“The trends we are seeing among our more than 2 million Gen Y participants are particularly exciting,” Mr. McDonald said in announcing the findings.


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    • The entire 401k/403b/457/IRA industry is simply a privatization of Social Security brought about by Americans’ semi-religious faith in markets over principled government. In reality this new system is no less of a “ponzi scheme” than Social Security– zillions of citizens have no choice but to plow their money into existing market entities regardless of the actual worth of those entities… more an more money just keeps coming while somehow our 401ks sit flatly while Wall Street keeps reporting record profits… I wish that Americans would wisen up to what they are losing in terms of the Security in Social Security. Besides the freedom from worry about retirement, we could all spend less time trying to outwit our fellow investors while making better contributions in our actual careers…

    • I think you’re right. The people who open a Roth IRA when they have aecscs to a 401(k) are probably more money-savvy than those who don’t and more personally motivated to save.We just have Roth IRAs because our employer doesn’t provide 401(k)s. Next job, I hope!

    • I agree they cost some Americans jobs through their dicret and indicret subsidies. These are not jobs our economy wants or needs. It frees our labor for higher skilled jobs. The problems are all with them, not US.FIFY.I’m not sure that they’re jobs that aren’t wanted. Besides, why do you seem so willing to sell out the US and the jobs for which are here? You seem to want to remove any path that results in a smooth, pro-US transition that benefits the displaced in a visible way.The visible and financial stuff is what pays the bills; the “imperceptible” does not. They are a convenient scapegoat …that has Audi-driving thugs that make junk and forcibly devalue their currency. We need to fix what’s wrong with us like unions, overregulation, high taxes, and low savings rates.This is the 21st Century, not the 19th or early 20th wrt the first two. If you want to feel like you’re some 19th Century deity in business, go to a Third World country, and don’t come back. But then the rampant corruption will make sure you don’t.goods we get from china have never been cheaper. The quality has also declined as well to mere junk that has the lowest possible opportunity cost (due to its volume crowding out quality). It’s a shame you wish to listen to the siren song from Asia.

    • “As for those who invest in Roth 401(k)s, they must contribute after-tax dollars. But once they retire, they withdraw the funds tax-free.”
      This statement should always end with the caveat “…unless a future Congress changes this for people above a certain adjusted gross income.”

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.