The 401(k) – Business Research Paper(300 Level Course)
Daily Water cooler talks in offices spread from Los Angeles to New York are filled with questions and rumors about the down fall of social security. George Bush has used social security as the only other major reform platform in his presidency second only to his war on terror. So why is it that Americans are saving less then ever before in US history.
US consumer savings are at its lowest level since the depression. In fact, it is estimated that US savings are at an astounding 0%. Consumers in 1980 saved an average of 10% of their salaries; in 2000 that number dropped to 2%.
Sky rocketing house prices have played a large role in the populous aversion to savings. With interest rates at an all time low, consumers are refinancing their homes for top dollar, allowing them to spend more money than they have coming in a month. The increasing home prices also lend itself to consumer over confidence in their homes as opposed to confidence in a savings account. With this upsetting trend of little to no savings for today’s consumers, surprisingly it is the US companies that are coming to the rescue.
With roughly $1.8 trillion in assets, the 401(k) is the fastest growing savings vehicle, according to research firm Cerulli Associates. Its assets are likely to surpass the $2.1 trillion in all institutional pension plans, whose growth rate is less than half that of the 401(k). The 401(k), which has turned 20 years old today, was a product of Ted Benna, a benefit consultant. The term 401(k) comes from the location of the tax loop hole that the savings plan come from. Paragraph k of section 401 of the national tax code focuses on employee rights to deposit a percentage of extra income, normally bonuses, into a company profit sharing plan. Since it’s meager beginnings, the 401(k) has turned into the single largest savings machine of the United States.
The 401(k) concept is an easy one to understand. Most companies that offer 401’s allow employees to take a pre-determined percentage of their salary, either before or after taxes, and invest it in a profit sharing account. This has a very positive side effect for American businesses. Profit sharing gives employees vested interest in the company’s future and success, it gives them something to work for. For the employees, it allows them to procure a large stock pile of money for savings while missing very little from their weekly pay checks. Partnered with a company match program, it is very feasible for even the average paid American worker to have a profitable retirement.
With the minimal savings that most American’s posses coupled with false hopes of being saved by medicare and home investments, the 401 has and will continue to be critical ingredient in America’s working force. It also is a great tool for employers to use to attract new and better talent. It is estimated that 45% of young professionals under the age of 30 look at the 401 as a strong selling point in choosing who to work for. Of course the company match percent is also a selling point as well. Currently Target contributes 100% of their employees contribution up to 5% of their income. Most companies range between 2% and 5%. Target markets its 401 as “its like giving yourself a 5% raise”.