Defined Contributions Insights MagazineJuly/August 2008
401(k) Success
It's not just about retirement.
by David Wray
According to a McKinsey study, the amount in 401(k) and similar programs will grow to almost $8 trillion dollars in 2015 while generating an additional nearly $3 trillion in IRA rollovers. Between their 401(k)s and IRAs, American workers will soon have more than $15 trillion to draw on during their retirement years. Contrast this to the $2 trillion projected to be in the Social Security Trust Fund. Because of their 401(k)s, never have so many had so much.
However, many young Americans enter the workforce financially unsophisticated and unaware of how our free-market system works. They also have no appreciation for how small amounts saved over time can grow stunningly large. In fact, many believe they can never accumulate the wealth necessary to achieve the American dream. It is an unfortunate fact that young Americans have been repeatedly told an anti-business story, with those responsible for delivering the goods and services we all depend upon cast as the villains.
401(k) Education and Financial Understanding
Fortunately, the benefits of 401(k) participation extend beyond retirement. The 401(k) system has become the mechanism for setting the record straight. An explanation of stocks and bonds and how the capital markets work is fundamental to every 401(k) education program. The fact that compounding makes small amounts large is at the core of every presentation urging young workers to save for their retirement in a 401(k). As 401(k) participants financial understanding grows, they learn the importance of profit as a motivator for excellence and innovation. This not only gives them an appreciation of our free enterprise system, it makes them more committed workers.
Critically, the 401(k) system reinforces our financial messages with results. After three or four years of participation, most 401(k) participants have $10,000 in their accounts. While such a small balance is usually dismissed in the ongoing public policy discussion about retirement income adequacy, such amounts make an incredible impact at the individual participant level. Millions of 401(k) participants who never thought they could save anything, who never understood how saving works, who never believed they could own a piece of the American dream, have had these self-limiting beliefs shattered. 401(k) participation has opened to them a new world of possibilities.
No one has done a study measuring how someone in their mid-30s is affected by having $60,000 in their 401(k) plan. I hope someone will. In my personal experience, such 401(k) participants feel better about their jobs, their futures, and, most importantly, about themselves. For most, they find such an achievement amazing. It is certainly something they would never have believed possible when they graduated from high school. 401(k) is about more than just retirement.
David Wray is PSCA’s president.