For the first time, half of private-sector workers in the U.S. are participating in 401(k) plans, marking a significant shift in how Americans prepare for retirement. Once dominated by pensions, the traditional workplace retirement plan has given way to defined contribution plans like the 401(k). This milestone signals a fundamental change in how workers save and how employers structure their retirement benefits.

Despite this progress, 40% of the workforce still isn’t saving enough for retirement, raising concerns about financial security for future retirees. Understanding how 401(k) plans became the dominant retirement savings account can help workers, employers, and policymakers improve retirement outcomes.

The Rise of the 401(k) as the Primary Retirement Savings Account

Decades ago, most American workers relied on pensions, which provided a guaranteed income in retirement. Over time, employers shifted away from pensions due to high costs and long-term liabilities, leading to the rise of employer-sponsored retirement plans like the 401(k).

  • The shift from pensions to 401(k) plans: Employers moved toward defined contribution plans, placing more responsibility on workers to save for retirement.
  • Tax advantages: Contributions made with pre-tax funds reduce taxable income, and investment growth inside the plan is tax-deferred.
  • Employer contributions: Many employers match a portion of employee contributions, helping workers build their savings faster.
  • Portability: Unlike pensions, 401(k) accounts stay with employees when they change jobs, allowing them to continue growing their savings.
  • Growing reliance on self-managed investments: Workers are now responsible for choosing their mutual funds and managing their investment returns.

Retirement Savings Trends: Progress and Challenges

The fact that half of private-sector workers now have access to 401(k) plans is a positive step, but challenges remain:

  • 40% of workers aren’t saving enough: Even with access, many workers fail to save enough to meet their future retirement needs.
  • Many Americans don’t contribute enough to receive the full employer match: This is lost money that could significantly boost retirement savings over time.
  • Freelancers and gig workers are left out: Many workers who aren’t in traditional employment don’t have access to an employer-sponsored retirement plan.
  • Confusion about investment options: Some workers struggle to decide where to invest their retirement contributions.
  • Rising inflation and living costs: Many workers hesitate to contribute more due to expenses and other financial priorities.
  • Underestimating post-retirement expenses: Many individuals fail to consider rising medical expenses and long-term care costs.

The Role of Individual Retirement Accounts (IRAs) in Retirement Planning

For workers without access to a 401(k) or those looking to supplement their savings, individual retirement accounts (IRAs) play an important role.

  • Roth IRA vs. Traditional IRA: A Roth IRA allows for tax-free withdrawals in retirement, as it is funded with after-tax contributions, while a Traditional IRA offers tax-deductible contributions. Seeking professional tax advice can help individuals determine which option best aligns with their long-term financial goals.
  • Contribution limits: IRAs provide another way for workers to save for retirement beyond their workplace plan.
  • Flexibility: IRAs offer a broad range of investment options, often with lower fees than some employer plans.
  • Self-employed retirement options: Gig workers and entrepreneurs can set up SEP IRAs or Solo 401(k) plans to build savings outside of traditional employment structures.
  • Long-term tax benefits: Maximizing contributions early in an IRA can lead to higher long-term growth due to compound interest.

Encouraging workers to use IRAs alongside 401(k) plans can help bridge the retirement savings gap.

Why Some Americans Struggle to Save for Retirement

Despite access to 401(k) plans, many workers still fall behind in their savings due to:

  • High living expenses: Rising costs make allocating money toward long-term savings difficult.
  • Medical expenses: Unexpected healthcare costs can force workers to withdraw from retirement accounts early.
  • Lack of financial education: Many workers don’t understand how to take advantage of tax advantages and employer contributions.
  • Social Security misconceptions: Some assume Social Security benefits will be enough, failing to save money independently.
  • Fear of investing: Many workers avoid mutual funds and stocks due to risk concerns, missing out on investment returns.
  • Short-term financial pressures: Immediate financial needs often take priority over long-term savings, especially for younger workers.

How to Strengthen Retirement Savings and Close the Gap

Workers, employers, and policymakers can take several steps to improve retirement outcomes:

  • Start saving early: The sooner workers contribute, the more they benefit from investment returns over time.
  • Maximize employer contributions: Employees should always contribute enough to take advantage of the full employer match.
  • Use catch-up contributions: Those over age 50 can make additional retirement contributions to grow their savings faster.
  • Seek financial guidance: Financial advisors can help workers create a strategy for retirement savings goals.
  • Set realistic savings targets: Workers should calculate their retirement age, adjust contributions to meet their desired income level, and consider using a tax refund to boost their retirement savings.
  • Budget for retirement expenses: Anticipating medical expenses, housing, and daily costs can prevent financial surprises.
  • Diversify investment portfolios: Balancing stocks, bonds, and other assets can help mitigate risks and maximize long-term growth.

The Future of Retirement Savings: Policy and Workplace Changes

With half of private-sector workers participating in 401(k) plans, the focus now shifts to expanding access and improving participation rates. Some potential improvements include:

  • Expanding employer incentives: Encouraging more businesses to offer retirement plans through tax credits and reduced administrative costs.
  • Automatic enrollment policies: Many employers now automatically enroll workers in their plans to increase participation.
  • Improved financial education: Workers need better resources to make informed financial decisions about their retirement accounts.
  • Stronger safety nets: Expanding Social Security benefits or providing additional support for low-income retirees.
  • Legislative initiatives: State and federal programs that offer access to workplace retirement plans.
  • Employer flexibility: Companies can offer more customizable savings options to meet employees' diverse financial needs.
  • Retirement planning technology: Digital platforms that assist workers in tracking contributions and projecting savings outcomes.

Taking Action to Secure a Strong Retirement

The 401(k) plan has become the foundation of retirement savings in the U.S., but gaps remain. Workers must take proactive steps to save money, and employers and policymakers must work to expand access and improve education.

Understanding how to maximize workplace retirement plans, including using catch-up contributions, tax benefits, and employer matches, can help workers reach their retirement goals.

Now is the time to take control of your financial future. Manifest simplifies retirement savings management, helping employees and employers optimize their 401(k) plans by consolidating old accounts from previous employers.

Schedule a demo today to explore solutions for better retirement planning.