Editing 401(k) (section)

==Criticisms and proposed reforms==

===Risk of loss===
Unlike defined-benefit pensions (regulated by [[Employee Retirement Income Security Act|ERISA]]) or an [[FDIC]]-insured savings account at a bank, there is no government guarantee for assets held in 401(k) accounts.

Investments in [[stock]]s can lose value due to market fluctuations. [[Diversification (finance)|Diversification]] can protect against poor performance in any one stock or industry, but not against a widespread decline like the [[Great Depression]] or [[Great Recession]]. Further diversification into [[Bond (finance)|bonds]] can protect against stock market declines, but generally have smaller earning potential and still carry the risk of bondholder default. Earners are generally advised to shift from higher-risk, higher-return assets to lower-risk assets as they near retirement age.

Money can also be lost if the plan sponsor has financial difficulties, though if a sponsor goes bankrupt, 401(k) account holders have high priority.{{fact|date=May 2024}} Earners can take sponsor risk into account when deciding whether to leave assets in the plan sponsored by a former employer or roll over the assets to a new employer plan or to an [[individual retirement account]] (IRA).

Fees charged by 401(k) providers can substantially reduce earnings.<ref name="mistake" />

===Choosing investments===

401(k) plans are restricted to investments chosen by employers. This can prevent earners from risky choices like picking individual stocks, but also from following a favored investment strategy or asset types (such as commodities), or choosing [[socially responsible investing]]. IRA providers typically offer a far wider selection of investments.

Conversely, 401(k) plans are sometimes criticized for putting the burden of choosing and updating investments on earners, most of whom are not experts in finance. Some earners avoid signing up for 401(k)s because of the perceived complexity. [[Target date fund]]s mitigate this complexity by automatically shifting investments from stocks to bonds based on time to planned retirement date.

===Inequality===
The tax breaks given for money invested in 401(k)s are only available to people who earn enough money to be able to save for retirement, and does nothing to help the lowest-income earners.<ref name="mistake">{{cite news |url=https://www.nytimes.com/2024/05/08/magazine/401k-retirement-crisis.html |title=Was the 401(k) a Mistake? |author=Michael Steinberger |date=May 8, 2024 |magazine=[[New York Times Magazine]]}}</ref> Households in the highest earning group saved enough to receive about 11 times more in retirement income.<ref>{{Cite web |last=Sullivan |first=John |date=2016-05-09 |title=Do 401(k)s Cause Income Inequality? |url=https://401kspecialistmag.com/401ks-cause-income-inequality/ |access-date=2025-03-26 |website=401k Specialist |language=en-US}}</ref> This exacerbates existing income inequality, especially if these larger retirement savings are used for the benefit of children (for example to pay for a better education, or simply as inheritance).

===Participation===
Offering 401(k)s is not mandatory, so not all employers do so; this means some workers simply cannot benefit from the tax breaks.<ref name="mistake" /> Benefits consultant Ted Benna, who first realized the favorable treatment this section of the tax code afforded defined-contribution plans, has proposed mandating that employers over a certain size offer 401(k)s.<ref name="mistake" />

In 2024, one group of researchers advocated ending the tax break for the 401(k) on the grounds that it did not increase aggregate retirement savings, and using the $200 billion in additional tax revenue to support the government-funded [[Social Security (United States)|Social Security]] program.<ref name="mistake" />

===Insufficiency of retirement savings===

The amount of money available in retirement from defined-contribution plans like 401(k)s varies considerably depending on the amount contributed and performance of investments. Reliance on these plans instead of defined-benefit pensions and the small fraction of earnings replaced by government programs like [[Social Security (United States)|Social Security]] means many people have an insufficient amount of money for retirement. According to US Census data, in 2017, 49% of Americans aged 55 to 66 had "no personal retirement savings".<ref name="mistake" /> This gap can force people to choose between continuing to work into old age (if they are healthy enough to do so) and living in poverty.

One bipartisan proposal to address this problem is to open the defined-benefit [[Thrift Savings Plan]] to all employees (currently it is only for federal government employees).<ref name="mistake" />