However,  over the past several decades, there has been a shift in pension plan  coverage; the number of DC plans has increased while the number of DB  plans has declined. Today, DC plans are the dominant type of private- sector employee pension. One option available under some 401(k) plans is automatic enrollment,  under which workers are enrolled in a 401(k) plan automatically, unless  they explicitly choose to opt out. The Employee Retirement Income Security Act of 1974 (ERISA), as  amended, defines and sets certain standards for employee benefit plans,  including 401(k) plans, sponsored by private-sector employers. Low Participation and Saving Rates Affect the Building of 401(k) Savings While Other Factors Affect Participants Ability to Maintain Retirement Savings

		Challenges to Building and Maintaining 401(k) Savings

One issue of concern with DC plans is that participation and saving rates  have been low. About 40 percent worked for an employer that did not sponsor a plan, and  about 8 percent did not participate in the plan that their employer  sponsored. Also, some may be focused on  more immediate savings objectives, such as saving for a house. We also found that, for workers who participated in DC plans, plan savings  were low. We reported that the account balances of  lower-income and older workers were of particular concern. 401(k) Leakage Erodes Retirement Savings Levels

In addition to somewhat small savings contributions, 401(k) participants  can take actions, such as taking loans, withdrawals, or lump-sum  cashouts, that reduce the savings they have accumulated. We also  called for measures to provide participants with more information on the  disadvantages of hardship withdrawals. The Pension  Protection Act of 2006 and recent regulatory changes have facilitated plan  sponsors’ adoption of automatic enrollment. One of our recent reports found that automatic enrollment policies can  result in considerably increased participation rates for plans adopting  them, with some plans’ participation rates increasing to as high as 95  percent and that these high participation rates appeared to persist over  time. TDFs allocate  their investments among various asset classes and shift that allocation  from equity investments to fixed-income and money market investments  as a “target” retirement date approaches; this shift in asset allocation is  commonly referred to as the fund’s “glide path.” Recent evidence  suggests that participants who are automatically enrolled in plans with  TDF defaults tend to have a high concentration of their savings in these  funds. Concluding Observations

DC plans, particularly 401(k) plans, have clearly overtaken DB plans as the  principal retirement plan for U.S. workers and are likely to become the  sole retirement savings plan for most current and future workers. Yet,  401(k) plans face major challenges, not least of which is the fact that many  employers do not offer employer-sponsored 401(k) plans or any other type  of plan to their workers. Workers have a role to participate  and save in 401(k) plans when they are given the opportunity to do so. Private Pensions: Increased Reliance on 401(k) Plans Calls for Better  Information on Fees.
Why GAO Did This Study

Over the past 25 years, the number of defined benefit (DB) plans has declined while the number of defined contribution (DC) plans has increased. Today, DC plans are the dominant type of employer-sponsored retirement plans, with more than 49 million U.S. workers participating in them. 401(k) plans currently cover over 85 percent of active DC plan participants and are the fastest growing type of employer-sponsored pension plan. Given these shifts in pension coverage, workers are increasingly relying on 401(k) plans for their pension income. Recently, policy makers have focused attention on the ability of 401(k) plans to provide participants with adequate retirement income and the challenges that arise as 401(k) plans become the predominant retirement savings plan for employees. As a result, GAO was asked to report on (1) challenges to building and maintaining of savings in 401(k) plans, and (2) recent measures to improve 401(k) participation and savings levels.

What GAO Found

There are challenges to building and saving through 401(k) plans. While low participation rates may be due, in part, to the fact that some workers participate in DB plans, there is also a large portion of workers who do not have access to an employer-sponsored retirement plan, as well as some who do not enroll in such a plan when an employer offers it. We found that for those who did participate, their overall balances were low, particularly for low-income and older workers who either did not have the means to save or have not had the opportunity to save in 401(k)s for much of their working lifetimes. There are also challenges workers face in maintaining savings in 401(k) plans. For example, 401(k) leakage--actions participants take that reduce the savings they have accumulated, such as borrowing from the account, taking hardship withdrawals, or cashing out the account when they change jobs--continues to affect retirement savings and increases the risk that 401(k) plans may yield insufficient retirement income for individual participants. Further, various fees, such as investment and other hidden fees, can erode retirement savings and individuals may not be aware of their impact. Automatic enrollment of employees in 401(k) plans is one measure to increase participation rates and saving. Under automatic enrollment, which was encouraged by the Pension Protection Act of 2006 and recent regulatory changes, employers enroll workers into plans automatically unless they explicitly choose to opt out. Plan sponsors are increasingly adopting automatic enrollment policies, which can considerably increase participation rates, with some plans' rates reaching as high as 95 percent. Employers can also set default contribution rates and investment funds. Though target-date funds are a common type of default investment fund, there are concerns about their risks, particularly for participants nearing retirement.