401(k)s remain a focal point of criticism when thinking about retirement security in America. One example is a recent op-ed column in The New York Times.

Perhaps the most commonly cited concern about 401(k)s is the size of current account balances. The typical investor approaching retirement has around $100,000 saved in various tax-deferred accounts.* That amount might generate $4,000–$5,000 a year in income. It’s been 30 years since 401(k)s appeared on the scene, so the thinking is that older investors should have much more money in these accounts than they do.

This argument, however, overlooks the rapid expansion of 401(k) plans over the past three decades. More people have come into the system over the years, and many who are ready to retire haven’t spent their full working careers saving in these plans.

To illustrate the point, here’s data from the U.S. Department of Labor: In 1980, just before 401(k) regulations came into being, there were about 20 million participants in defined contribution plans.** By 2009, the latest data available, there were 87 million participants in 401(k)s and similar plans. Even after allowing for double-counting (e.g., you might have an account with both a current and a prior employer), there’s been a substantial expansion in the number of individuals participating in 401(k) plans. I like to characterize the expansion of 401(k)s as somewhere around its midpoint, and that’s what we see reflected in balances. Retirement balances should continue to grow, through a potential combination of contributions and investment returns, and as more participants have longer tenure in the system. It wouldn’t surprise me if median balances doubled in the next eight to ten years, as they have done in the past.***

Another worry with 401(k)s is that participants in the plan can get at the money before retirement—a problem known as “leakage.” During the recent financial crisis, much attention was given to loans and hardship withdrawals, although this attention missed the point, since most loans are repaid and hardships affect only a small fraction of workers. The biggest source of leakage, instead, is that workers can access their 401(k) savings when they change jobs. Congress has established a gentle “nudge” to discourage workers from touching their money (if they do, they owe taxes plus a 10% penalty), but otherwise leaves it to the individual to decide what to do with these savings.

Pre-retirement access tends to hurt individuals who lack self-control or planning skills. Imagine two workers with identical financial circumstances and identical 401(k) balances plans who are both laid off from their jobs. The first worker does everything possible to live on unemployment, avoids touching her savings, and seeks out new employment. The second worker uses her retirement savings to maintain her prior standard of living and delays her search for work. As a result, the second worker is more likely to deplete her account than the first. Certainly, Congress could do more to help discourage the second worker from depleting her savings—but it entails imposing restrictions that would affect all participants.

The fact is, we’re in the midst of a transition from one type of private retirement plan to another—from traditional pensions to account-based plans. Most of the worry reflects the fact that we’re in a transitional state, and the future seems uncertain.

But the long-term outlook for 401(k)s and retirement security is positive. Independent forecasts show that 401(k) account balances will continue to grow over the long term, not just for the individual but relative to the economy, providing a growing pool of resources needed to finance retirement security.****

* The research community tends to group all tax-deferred retirement accounts together because the assets are fungible—for example, you might have had money in a 401(k) at one employer and a profit-sharing plan in another, and rolled the balances into a rollover IRA.
** These participants were in predecessor plans to the 401(k), including money purchase, profit-sharing, ESOP and after-tax savings plans.
*** According to the Survey of Consumer Finances from the Federal Reserve, the median retirement account balance for those between the ages of 55 and 64 was $22,000 in 1989, $46,800 in 1998, and $98,000 in 2007. During this period, the fraction of households in this age group with an account grew from 43% in 1989 to 58% in 1998 to 61% in 2007.
**** See James Poterba, Steven Venti and David A. Wise, 2007, “New Estimates of the Future Path of 401(k) Assets,” NBER Working Paper 13083, www.nber.org.