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Here’s why your 401(k) plan is sexist

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There are a lot of problems with 401(k) plans. Fees are hidden, and often too high. They are overexposed to the market, especially when account holders are nearing retirement, and sometimes underexposed before. And they often come with little advice on how much to save and how to invest. They are not funded as well as traditional pensions. Also, they haven’t done all that well.

Add another one to the list: 401(k)s are sexist. That’s according to new research from Financial Finesse, a company that provides financial education programs to some 600 organizations. The research finds that the average 45-year-old male has about $270,000 less in their retirement savings accounts then they need to retire comfortably at age 65. Not great. But for the average 45-year-old woman, the shortfall is nearly double that amount, or $522,000.

It’s not immediately clear why 401(k) plans would be worse for women than for men. A Vanguard study last year found that women are more likely than men to be enrolled in their 401(k). Nonetheless, they end up worse off.

 

The first problem has to do with the fact that the 401(k) plans, and savings in general, are tied to income. If you make more, you save more, generally. And, as Fortune recently found, there are only two professions where women make more or nearly the same as men, and, on average, women make just 83% of what men make. That’s not the fault of 401(k) plans. It’s a bigger social problem. Women generally get less from Social Security as well.

But 401(k) plans exacerbate the problem. That’s because the plans are almost always set up so that employees make contributions as a percentage of their salary. So even though a 401(k) plan maxes out at the same dollar amount, $18,000 this year, no matter what your income, or gender, most people don’t think about their contributions in dollar terms. Most people chose what sounds like a reasonable amount of their income to put away for retirement, say 6%, and never change it. That means workers who make less also save less, even if they could afford to put away the same amount as higher earning peers. Talking about retirement contributions in terms of dollars first, rather than percentages of income, might help address this problem.

But here’s the thing: according to the study, lower salaries only made up $56,000 of the $252,000 retirement gender savings gap. The rest, a nearly $200,000 gap, came from the fact that women tend to live longer than men and therefore need more money for retirement.

The fix here is a little bit harder. The obvious solution is to try to kill off women faster than we are now, so that fewer of them outlive their retirement savings. I’m guessing very few people would go with that option. A second fix would be to transform the 401(k) system to one where we all pay into insurance, and then collect as long as we live, possibly by forcing people to buy annuities with their 401(k) savings when they retire. It could be a requirement to make the plans tax free. And you could give an added tax bonus for going into an annuity.

Women would still probably receive less retirement income from their annuity, but the shorter lives of men would in part fund the extra years of payouts that would go to women. It would be more equitable, but still not completely equal.

Of course, that change would be a hard sell politically. The thing people like most about 401(k) plans is their flexibility and the control they have over their retirement savings. But as long as we strive for individuality in retirement plans, we are going to have to live with the gaps.