Individuals have a realistic chance at a secure retirement when they augment Social Security with appropriate savings behavior. 401(k) and similar types of plans (“401(k) plans”) are the most promising vehicles to foster good savings behavior, particularly when plans have automatic features that can help individuals make the right savings decisions.1 The Pension Protection Act of 2006 (PPA) significantly improved the effectiveness of 401(k) plans by facilitating the adoption of features such as automatic enrollment and automatic contribution escalation, which help to increase participation and improve savings adequacy.
With fewer future retirees receiving retirement income from traditional pension plans, the role of 401(k) plans is becoming increasingly important. Social Security will continue to play a critical role, providing approximately 40 percent of the average retiree’s income.2 (Social Security represents a higher percentage of income for lower-income retirees, and a lower percentage for higher-income retirees.)3 An important follow-up question thus becomes, “What percentage of retirement income should 401(k) plans provide?” New research by the Center for Retirement Research at Boston College (CRR) addresses this question.
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1 This includes the various types of defined contribution or deferred compensation plans, such as 401(a), 403(b) and 457 plans, that provide similar savings benefits as 401(k) plans.
2 Employee Benefit Research Institute, “EBRI Notes,” p. 1, June 2010.
3 Ibid, p. 2.