Are 401(k)s Still Working? Alternatives for the Next Generation

Are 401(k) plans still an effective way to save for retirement today and for the next generation? Let’s get right into the numbers. According to the Bureau of Labor Statistics, about 68% of private industry workers in the U.S. had access to a retirement plan in 2023, but only 51% participated.

Even for those who do contribute, the median 401(k) balance for workers aged 55 to 64 is just around $71,000 (as reported by Vanguard). That’s a worrying figure, considering the rising cost of living, increasing healthcare expenses, and longer life expectancies.

The original intent of the 401(k), introduced in 1978, was to supplement traditional pensions, not replace them. However, as pensions have all but disappeared from the private sector, 401(k)s have taken center stage.

But are they enough? In today’s world of volatile markets, high fees, and shifting job patterns—like gig work and self-employment—many are beginning to ask whether the 401(k) is still the best option.

The Rise (and Stall) of the 401(k): How We Got Here

The 401(k) was born out of the Revenue Act of 1978, designed to offer tax-advantaged retirement savings through employer-sponsored plans. It quickly gained popularity, especially in the 1980s, as companies moved away from defined benefit pensions toward defined contribution plans to reduce long-term liabilities.

The goal was simple: give workers a way to save pre-tax dollars, let them choose investments, and rely on the market to grow their retirement nest eggs. For years, it seemed to work. Contributions were automatic, and companies often matched a portion, incentivizing participation.

Current Statistics

Despite these numbers, many workers face significant shortfalls. When you consider that a comfortable retirement often requires 25 times your annual expenses, the average balances fall dramatically short.

Current Challenges: Why 401(k)s Might Not Be Enough

High Fees

Many 401(k) plans carry administrative and investment fees. Even a seemingly small annual fee of 1% can eat away 28% of retirement savings over 35 years.

Limited Investment Options

Most 401(k) plans offer a narrow range of mutual funds and target-date funds, which may not align with an individual’s investment goals or risk tolerance.

Participation Gaps

Low-income workers, gig workers, and small business employees often lack access to a 401(k). Even when access is available, participation rates are low due to immediate financial pressures.

Market Volatility

Recent market crashes—like the 2008 financial crisis and the 2020 pandemic dip—have shown the risks of relying on market performance. Those nearing retirement during a downturn can see their balances shrink at the worst time.

Economic Shifts

Stagnant wages, high student debt, and rising housing costs leave many workers unable to maximize contributions.

Next-Gen Realities: The Gig Economy, Student Debt, and Longevity

Today’s workforce is changing fast. More than 36% of U.S. workers are part of the gig economy, with no access to employer-sponsored retirement plans. Additionally, the average student debt in the U.S. is over $37,000, often delaying retirement savings.

Longer lifespans mean retirement may last 30+ years, stretching savings thinner than ever before. A 401(k) that was designed when average life expectancy was lower may no longer be sufficient.

Alternatives to 401(k)s: What’s Out There?

With growing concerns about the limitations of traditional 401(k) plans, more workers are exploring alternative options to build a secure retirement.

These alternatives offer unique advantages—some with better flexibility, tax benefits, and investment choices. Here’s a closer look:

Roth IRAs

A Roth IRA (Individual Retirement Account) is a popular alternative to 401(k) plans, especially appealing to younger workers. Unlike traditional 401(k)s, Roth IRAs are funded with after-tax dollars. This means you pay taxes upfront on contributions, but qualified withdrawals—including earnings—are tax-free in retirement.

Roth IRAs are ideal for workers who expect to be in a higher tax bracket in the future, such as those early in their careers. With a contribution limit of $7,000 for 2024 (or $8,000 if aged 50+), Roth IRAs provide a valuable way to build retirement savings outside of employer-sponsored plans.

One key advantage is the broader investment selection—Roth IRAs can include stocks, bonds, ETFs, mutual funds, and even certain alternative assets, depending on the custodian.

Another major benefit? There are no required minimum distributions (RMDs) during the account holder’s lifetime, allowing savings to grow untouched for longer. However, eligibility to contribute is limited based on income—high earners may face restrictions.

Health Savings Accounts (HSAs)

While primarily designed for healthcare expenses, HSAs are one of the most tax-advantaged savings vehicles available—and they can double as retirement accounts.

To qualify, you must be enrolled in a high-deductible health plan (HDHP). HSAs offer a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.

Unused funds roll over from year to year, and once you turn 65, you can withdraw funds for any purpose (though non-medical withdrawals are subject to ordinary income tax, similar to traditional IRAs). For many, HSAs become a “hidden IRA,” especially if they can cover current medical costs out of pocket and let HSA funds compound over decades.

In 2024, the HSA contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, plus a $1,000 catch-up contribution if aged 55 or older.

Taxable Investment Accounts

Unlike retirement accounts with strict contribution limits and tax rules, taxable brokerage accounts offer flexibility and accessibility. Investors can contribute as much as they want and withdraw at any time without penalties. These accounts can hold a wide variety of assets, including stocks, ETFs, bonds, mutual funds, and real estate investment trusts (REITs).

While they don’t provide upfront tax advantages, taxable accounts allow for tax-loss harvesting (offsetting gains with losses) and the potential for long-term capital gains tax rates, which are often lower than ordinary income tax rates. Dividend income may also benefit from favorable tax treatment.

For younger workers who might need access to funds for a down payment, education, or entrepreneurial ventures, taxable accounts provide both growth potential and liquidity that 401(k)s and IRAs lack. However, it’s essential to manage these accounts carefully to avoid excessive trading and tax burdens.

Real Estate

Real estate has long been a popular retirement savings and income strategy. Whether it’s purchasing rental properties, investing in REITs, or participating in real estate crowdfunding, these options provide an additional layer of diversification and can serve as a hedge against inflation.

Direct ownership of rental properties can generate steady cash flow through rental income and offer tax deductions for expenses like mortgage interest, property taxes, and depreciation. However, managing properties requires time, expertise, and risk tolerance. Vacancies, maintenance issues, and market downturns can affect returns.

For those seeking a more hands-off approach, REITs—which pool investor funds to buy and manage real estate—can be an attractive option. Publicly traded REITs offer liquidity similar to stocks, while private REITs may offer higher returns with less volatility.

Emerging Fintech Solutions

The financial technology boom has created innovative platforms that democratize investing and make it easier for younger and less experienced investors to build wealth. Micro-investing apps like Acorns allow users to invest spare change from purchases, while Robo-advisors like Betterment and Wealthfront provide automated, diversified portfolios with low fees.

These platforms often feature low minimum balances, automatic rebalancing, and goal-based investing tools. Fractional shares let investors buy small pieces of expensive stocks like Amazon or Tesla, making it accessible even with limited funds.

Many fintech solutions also include education tools and transparent fee structures, empowering users to make informed decisions.

Some platforms cater to gig workers and freelancers by offering IRAs or SEP-IRAs with streamlined account setup and management. Others incorporate ESG (Environmental, Social, Governance) investing options, aligning with younger generations’ values.

Hybrid Strategies: Combining 401(k)s with New Approaches

A blended approach may offer the best of both worlds:

Sample Retirement Savings Strategy

Case Studies and Examples

Policy and Systemic Change: What Needs to Happen?

Legislative proposals like the SECURE Act 2.0 aim to expand automatic enrollment, increase catch-up contribution limits, and improve access for part-time workers. Employers can help by offering more flexible plans, matching contributions for gig workers, and reducing fees.

Meanwhile, financial education should be a priority, starting in schools and continuing through employer-provided resources. Transparency in fees and investment options is essential for empowering workers to make informed choices.

Conclusion

The 401(k) system, while a valuable tool, is showing cracks under the weight of economic, demographic, and social changes. It may have worked well for previous generations, but today’s workers face a different reality—gig work, student debt, volatile markets, and longer lifespans.

Instead of relying solely on traditional plans, the next generation needs a diversified approach: blending employer-sponsored plans, IRAs, HSAs, real estate, and fintech platforms. Armed with knowledge and proactive strategies, workers can build a retirement plan that adapts to their unique circumstances and secures their financial future.

It’s time to think beyond the 401(k) and embrace a multi-pronged approach to retirement savings—because the stakes have never been higher.