The Surprising Reason Americans Don’t Save More in Their 401(k) Plans

A lack of understanding is holding many back from contributing more to one of the most popular retirement plans

Amanda Alix
Amanda Alix
Sep 1, 2014 at 12:03PM

It's no secret that Americans are woefully unprepared for retirement. A recent study by Natixis Global Asset Management ranks the top 20 countries for retirement security, noting that the U.S. barely makes the list, coming in at No. 19.

To be fair, Americans do try to plan ahead, but many feel they simply can't afford to save right now for a far-away future. Of those that are actively saving, 401k plans are the hands-down favorite. But many are not taking full advantage of this defined contribution plan, whereby you choose the amount of money your employer places into your account – often with an additional contribution from your company.

Too confusing...
There is little doubt that American workers love 401(k) plans. Charles Schwab's new 410(k) Participant Survey showed that 87% of respondents value this workplace benefit above most others, including an extra week of vacation time.

The problem, it seems, is that workers find the plan rules complicated, and their lack of understanding inhibits them from utilizing the accounts to their fullest. Worse yet, participants aren't asking questions in order to overcome this knowledge gap.

Interestingly, both the Natixis and Schwab studies find this to be the case, with the latter noting that an equal number of employees consider 401(k) plans to be as incomprehensible as employer-based health insurance policies. 

...and too passive
Why don't employees speak up when they have questions about their 401(k) accounts? Surprisingly, part of the problem seems to be one of the retirement option's main attractions: its passive nature of saving. Once workers join, they appear to adopt a "set and forget" mind-set, allowing the account to grow without any additional input. The Schwab poll found that respondents reported spending more time researching a new car purchase than considering choices for their 401(k) account. 

Natixis found a similar lack of gumption, noting that passive participation must become more active if employees are to benefit fully from this savings option. This report also notes that many workers blame a lack of employer participation, as well – either employers do not match contributions, or do not offer appealing investment options – for their own minimal involvement in their 401(k) plan. 

How employers can help
Natixis notes that nearly half of respondents said that they would step up their 401(k) contributions if they had a better understanding of how their plan worked. Employers can be a big help here, ensuring that workers have adequate information on a regular basis. Since most employees wait until they are close to retirement to seek assistance, keeping workers up-to-date is the best way to spur involvement. 

Employers can increase their matching contributions, as well. Currently, mid-sized companies are the trailblazers here, with 41% having stepped up their contribution matches. Companies with more than 10,000 employees are lagging behind, with only 33% doing so.

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How you can help yourself
Become more active in your 401(k) plan by asking questions of your employer. Overcoming the inertia that seems to blanket 401(k) participants is an important first step, since many workers report that they do not take advantage of employer-supplied planning tools, despite convenient access. 

If you don't know which questions to ask – or are not satisfied with the answers you receive – engage the services of a financial advisor. Schwab's study shows that 70% of those surveyed expressed high levels of confidence in their investment decisions with the aid of an advisor, compared with 39% of those who did not avail themselves of such services.

Do your own research, as well. The Internal Revenue Service has an exhaustive amount of information for those who care to learn about 401(k) plans. The most important thing is to get involved, and stay involved – your future literally depends on it.