401(k) Adequacy and Employer Liability

At a recent conference I was asked If DC plan sponsors should be concerned about being sued if their 401(k) participating employees enter retirement with inadequate resources. It's time to put this question to rest. No, they should not be concerned. First, American workers will typically work for several employers before they retire so future retirees relying solely on DC accumulations will likely have several accounts when they exit the workforce. Already, participants changing employers have chosen to leave 15 million accounts with former employers. Then there is $4 trillion in IRAs most of which is the result of rollovers from employer plans. Not to be cute, but which employer is the participant going to sue. What about the IRA provider?

Second, what is adequate? A married working couple with the combined annual income of $100,000. They have three children they have put through college. They now pay about 30% of their income in FICA and federal and state income taxes and are saving 20% of pay in their 401(k)s. They are living on $50,000 after taxes and savings are subtracted. Social Security will pay them $30,000 at normal retirement. Currently, most modeling calculators use 80% of final pay ($80,000 in this case) as a target but they need only $50,000 to replace their current net income. They can easily generate $20,000 a year from our 401(k) plans but will be well short of the $50,000 the models suggest. Do they individually, or as a couple, have a legitimate case against an employer because their 401(k) savings are not adequate? Of course not.

DC plans provide a structure so that companies and their workers can contribute from current earnings amounts to be used later for retirement. Because of employer involvement these plans provide the best opportunity in the world for workers to accumulate personal wealth. However, the system requires no guarantees and it is misleading to suggest that there are or ever will be.