Bloomberg Tax
May 5, 2023, 9:11 AM

Low Financial Savvy, Inflation Erode New 401(k) Law’s Benefits

Austin R. Ramsey
Austin R. Ramsey

A combination of inflation-driven historic cuts in 401(k) contributions and low financial literacy among workers may prevent investors from reaping the benefits of a new set of retirement laws designed to boost access and market resiliency.

A quarter of working adults across age and gender groups slashed their nest egg contributions in 2022, according to new research from the TIAA Institute and Global Financial Literacy Excellence Center at George Washington University. Nearly half of those workers stopped saving for retirement entirely.

Most workers cutting contributions in response to post-Covid market swings are going it alone, relying on little to no advice about their savings goals and leaving their employers and plan sponsors out of the loop, a separate set of data from the Employee Benefit Research Institute shows.

Taken together, the results suggest new SECURE Act retirement access laws designed to improve 401(k) participant resiliency could be less effective amid communication breakdowns between workers and their employers, researchers say. Short-term retirement decisions savers make about their contributions compound over time, with thousands of dollars in potential earnings and future retirement readiness on the line.

“Workers are telling themselves, ‘I’ll just cut back on my retirement savings to free up some money to get me through this rough patch,’” said Paul Yakoboski, a senior economist at the TIAA Institute. “It’s a short-term fix with longer-term implications.”

Messaging Problem

The SECURE 2.0 Act (Pub. L. No. 117-328) signed into law late last year includes a long list of optional provisions employers can choose to help workers save for emergencies, pay off student loans while still saving for retirement, or offer in-plan guaranteed lifetime income products.

Together with the SECURE Act of 2019 (Pub. L. No. 116-94), Congress has used the measures to encourage more 401(k) automation, recently instructing employers to sign all their new hires up for escalating contributions.

But even with auto features in place, most participant-directed 401(k)s ultimately put savers behind the steering wheel, and the data suggests they are far too eager to react to day-to-day market trends and treat contributions like disposable income.

That amounts to a messaging problem for employers, said Andrea Hasler, deputy GFLEC academic director and assistant research professor at the GWU School of Business.

“Automatic features are great, but they should be used in combination with efforts to raise financial awareness among employees, so they know what they’re getting into,” she said.

The automatic contributions authorized under the SECURE 2.0 Act will be overwhelmingly defaulted into target-date funds, but only 44% of EBRI survey respondents said they understood what the “TDF” acronym even means.

“If you don’t even understand the basics of investing, how do you expect to chase returns, even though that’s not what you really should be doing?” said Craig Copeland, director of wealth benefits research at EBRI. “That’s the messaging problem.”

Fiduciary Compliance

Workers are heading into life-altering retirement decisions with what appears to be a false sense of confidence.

Seven in 10 savers report feeling sure about choosing the right investments for their situation, according to the EBRI’s 2023 Retirement Confidence Survey, conducted with the help of Greenwald Research.

At the same time, the TIAA Institute-GFLEC Personal Finance Index, an annual barometer for financial literacy, paints a different picture. The index assesses personal financial knowledge through a series of 28 questions across eight functional areas. On average, less than half of working adults were able to answer those questions correctly, the research revealed.

“Why would we expect anything different?” said Yakoboski. “Generally, we’re not learning financial literacy at home, students aren’t being taught financial literacy in school, and employers aren’t teaching it at work.”

That lack of financial knowledge makes solving the problem more difficult for retirement plan sponsors who need to have a solid understanding of their workers’ financial needs to tailor their 401(k) plan design to meet them. But financial advice is fiduciary advice under the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406), which gives plenty of employers pause.

Once employers let their gentle nudges turn into advice about investments, they could be held personally liable to their participants and beneficiaries for the returns on their investments. Instead, many employers are turning to financial wellness benefits packages, hiring third-party coaches to aide their workers through even the most mundane financial decisions.

“Workers need to understand that if they start saving now, they’ll be better off in the long run,” said Hasler. “That message isn’t getting across yet.”

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editor responsible for this story: Rebekah Mintzer at; Martha Mueller Neff at

Learn more about Bloomberg Tax or Log In to keep reading:

Learn About Bloomberg Tax

From research to software to news, find what you need to stay ahead.

Already a subscriber?

Log in to keep reading or access research tools.