What Explains the Retirement Savings Shortfall?

In a perfect world, the typical worker would have saved $364,000 in a 401(k)/IRA retirement account by the time he or she was aged 55 to 64. Instead, the typical worker at age 55 to 64 has accumulated only $92,000.

What accounts for the gap in what should be and what is? In a study to determine the reasons for the gap, researchers at the Center for Retirement Research (CRR) analyzed IRS tax records and data from the Census Bureau's 2014 Survey of Income and Program Participation. First they estimated potential 401(k) balances in a perfect world—a world in which there is universal coverage, consistent contributions of 9 percent of earnings (6 percent contributed by workers and 3 percent by employers), no early withdrawals, and no fees. In that world, retirement savings for the typical worker aged 55 to 64 would amount to $364,000.

But the world is not perfect. The results of the CRR analysis show that one of the biggest reasons retirement savings are falling short of their potential is the immaturity of the 401(k) system, which went into effect in the early 1980s. Consequently, the "relatively recent shift from traditional pensions to the newer 401(k) plans means that many of today's 60-year-olds did not participate in a 401(k) plan when they were young workers," explain the researchers. Another major reason retirement savings are not as high as they could be is the lack of universal coverage. Many employers do not provide their workers with the opportunity to participate in a 401(k) plan. Lesser reasons for the shortfall are fees and leakages.

Here is how each of these reasons reduces the $364,000 potential in retirement savings to a paltry $92,000...

IRA balance for typical worker aged 55 to 64
$364,000 potential in a perfect system
Reduced to $247,800 after accounting for the immature 401(k) system
Reduced to $136,200 after accounting for the lack of universal coverage
Reduced to $122,800 after accounting for fees
Reduced to $92,000 after accounting for leakages

Source: Center for Retirement Research at Boston College, Why Are 401(k)/IRA Balances Substantially Below Potential?