Good Question: Is The 401(k) Program A Success Or Failure?

MINNEAPOLIS (WCCO) -- The number one way of saving for retirement in America is the 401(k). But one in four Americans has dipped into that savings account early to pay bills.

If people are using their main source for retirement savings as a bank account, is the retirement system working?

According to HelloWallet, Americans take $70 billion from their 401(k) accounts every year to pay for their mortgages, car payments and other expenses.

"There's a lot of features of 401(k)s that do work, there are some that don't work," said Colleen Flaherty Manchester, an assistant professor at Carlson School of Management. Manchester has researched 401(k) extensively.

"Not enough people sign up and also contribution rates are too low, especially early in your career," she said.

According to HelloWallet, people in their 40s are most likely to pull money out early.

"It's one of the few savings vehicles that individuals have, and they feel like they need to tap into that," she said.

But only 40 percent of American households have someone living in them with access to a 401(k) plan. Of those with a plan, close to 80 percent are taking part. But the federal government reports that half of all Americans have saved less than $25,000 for retirement by the time they reach retirement.

Some economists consider the reliance on 401(k) to be a failure, when it was originally intended to be part of a system for retirement savings, including pensions and Social Security. Giving people control of their accounts has led to fewer dollars saved for retirement.

"It's hard to think of your future self," Manchester said.

Some companies are trying to make new employees automatically enroll in the 401(k), instead of having to opt-in. But typically the automatic enrollment is set at 3 percent of someone's salary.

"Those default contribution rates sometimes are too low. An individual, if they were on their own initiative, would have signed up at a higher rate," Manchester said.

The bottom line is the last 35 years of the 401(k) hasn't been an overwhelming success.

"If you look at new workers entering the labor force, their only retirement plan is the 401(k) plan. We have yet to see how this will perform when it's your primary plan," Manchester said.

She added: "Saving for retirement is very difficult problem. It's complex."