401(k): Tax Shelter or Retirement Plan?

The findings of a new study from the National Bureau of Economic Research (The Drawdown of Personal Retirement Assets, Working Paper 16675) suggest that defined-contribution retirement plans such as 401(k)s may be more of a tax shelter for the well-off than a serious way for the average worker to save for retirement.

In a typical year, only 17 percent of householders aged 60 to 69 with a personal retirement account--i.e. a 401(k)--withdrew any money from the account. Just 17 percent! Apparently, most households with personal retirement accounts do not need the money to pay the bills. The study found that withdrawals from these accounts do not become common until they become mandatory at age 70.5. "The sharp increase in withdrawals when distributions become mandatory suggests that many households in their early 70s would not make withdrawals if it were not for the distribution rules," say the authors of the study.

Employee Benefits Survey data show that only 9 percent of workers with wages in the bottom 10 percentile of the wage distribution participate in defined-contribution retirement plans. Among workers with wages in the top 10 percentile, the 54 percent majority participate.