Retirement income gap between rich and poor

Many workers can't access retirement accounts

The retirement system in America favors highly skilled and well-paid workers. Workplace retirement accounts -- employer-sponsored plans -- represent the best chance individuals have to save for retirement, but the ability to access a taxpayer-subsidized account is wholly dependent on an employer's generosity.

In 2011, 48 percent of Americans were not offered a retirement plan through their employer, according to a June 2013 study from the NIRS. That's 44.5 million people shut out from one of the most powerful retirement savings tools available, according to the study, titled "The retirement savings crisis: Is it worse than we think?"

Can't people just save on their own?

There are other tax-advantaged accounts available for everyone -- namely IRAs. Given their limitations, IRAs are an untenable answer to the nation's retirement-income gap problem. The accounts allow just a fraction of the savings that can be squirreled away in an employer-sponsored plan such as a 401(k). The annual contribution limit for an IRA in 2014 is $5,500 compared with $17,500 for the 401(k). Realistically, saving $5,500 a year would be a great improvement for many people, but the tricky part is that IRAs require people to set up the account and make annual contributions.

"Any time you have to have people proactively, voluntarily save, as opposed to just automatically saving, you tend to have poorer outcomes," says Rhee, author of the NIRS study.

Inertia stops most people from taking the initiative to open an account. So inertia can be partially blamed for the retirement income gap between rich and poor.

"Individual responsibility is important. But we are looking at a large-scale social problem. There has been a lot of research on behavioral finance, which is why you have to look at how people actually behave, not just how you wish they would behave," she says.

Automation a positive development

Researchers studying retirement saving and investing have found that making savings automatic vastly improves the retirement picture for most people. In the United States, automating savings means that employers auto-enroll participants into 401(k) plans and put their contributions into qualified default investment options. Some states, California for instance, are designing automatic IRA programs that would require employers without a retirement plan to automatically enroll workers in a state-sponsored retirement savings program.

"If you look at the cross-national research, it is really clear that the purely voluntary systems all have poor outcomes. That is just the way it works," Rhee says.

Rate of return important

Simply socking away money in a bank account for 30 or 40 years won't get most people to retirement. Some kind of investing is required to achieve a decent rate of return over time. The higher the rate of return, the more quickly savings begin to double and triple.

But investing can be a daunting proposition, and many individuals make mistakes when planning their retirement portfolios. They may invest too conservatively or too aggressively for their situation, which can have long-term consequences.

"Your average rate of return while you are investing is very much positively correlated with your probability of success," says VanDerhei.

But, this piece of the retirement challenge -- the difficulty individuals have investing -- may be solved as automatic enrollment into retirement plans and default investment options such as target-date funds become the standard.

"The nice thing about that is that if you put a young person into a target-date fund, it is going to be managed in an age-appropriate fashion. It is going to be rebalanced. And once you put them in there, let us just say it is very, very sticky. Very few 401(k) participants automatically enrolled in a planned target-date fund end up moving that money out to something else," VanDerhei says.

That's the type of inertia that works in participants' favor.

Employers, regulators and lawmakers are only now learning the secrets of getting an entire generation into retirement successfully. It may be a steep learning curve, but eventually the income disparities seen in today's retirement generation could be reduced. Maybe in the future, everyone will retire into prosperity -- or at the very least, into financial stability.


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