Do 401(k) plans favor the rich?

 Matthew Heimer for MarketWatch writes: Among the many things that consumer advocates don’t like about 401(k) plans (along with high fees, crummy investing options and the fact that workers have to make decisions that put their retirement income at risk), there’s this one: 401(k) tax perks are skewed toward the rich. This week, a researcher who studies 401(k)s addresses the question: Do these tax breaks make a big difference to account-holders’ bottom lines?

The unfairness argument goes something like this: The rule that lets savers fund 401(k)s with pretax income—a tax break worth about $100 billion a year to plan members—is more valuable to high earners, because the higher your tax rate, the more money you save via the deduction. As some economists (most recently Harvard’s Raj Chetty) have noted, the tax breaks don’t lead affluent people to save more money, but rather encourage them to move savings out of investments that don’t have tax advantages and into 401(k)s. The result, critics argue, is that higher-income savers are getting the lion’s share of the benefit from a tax incentive that, strictly speaking, they don’t need.

But when it comes to the savings amassed in people’s 401(k)s, it turns out the lion’s share doesn’t look a lot different than the lamb’s—at least as measured as a ratio of the savers’ salaries. In a recent blog post, Nevin Adams, co-director of retirement research at the nonprofit Employee Benefits Research Institute takes a look at 401(k) balances in EBRI’s bulging database of retirement accounts. Tunneling down to look at workers in their 60s, Adams finds that among workers with similar tenure at their jobs, the ratios of savings to salary stay about the same for savers with annual incomes from around $30,000 all the way up to $100,000. For those with 10 to 20 years of service at a company, for example, it hovers just above 150% of annual income.

Just as notably, for those with income above $100,000, the ratios drop sharply; in that 10-to-20-year group, for example, the ratio of savings to income falls to under 100%.

What’s holding the wealthier savers’ balances in check? As Adams points out, there’s an effective ceiling on 401(k) savings, in the form of the annual cap on contributions (currently $22,500 for savers over 50) and other more arcane rules. In the grand scheme of things, of course, higher earners will almost always have more and better retirement-savings options than their mainstream peers; but Adams argues that the 401(k) system does indeed “maintain a certain parity” within its own borders.