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E-MailQuinn Curtis is Albert Clark Tate, Jr., Professor of Law at the University of Virginia School of Law, Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School, and David Webber is Professor of Law at Boston University. This post is based on their recent paper.
ABSTRACT: Incentives for individuals to save for retirement currently total 1.5% of US GDP. For that substantial investment, we get a system that actually deepens wealth inequality. The top 10% of earners capture 60% of the associated tax benefits, and employer matching contributions disproportionately favor the highest earners. Although defined contribution plans have long been subject to non-discrimination requirements aimed at ensuring that benefits do not accrue predominantly to the wealthiest participants, these rules have little bite. In an irony, we estimate that the entire 401(k) system would fail the non-discrimination test that every employer offering such a plan is expected to pass. This Article examines the structural causes of these disparities, including growing income inequality, critiques the shortcomings of the non-discrimination rules, and proposes practical reforms to the 401(k) system, alongside a supporting increase in the minimum wage. Our reforms would realign public policy to address the related needs for more economic equality and to provide equitable incentives for retirement savings for the many, not just the few. Ultimately, these reform proposals seek to get the most value for the American public out of the considerable retirement tax expenditures under §401(k).
U.S. taxpayers subsidize retirement savings through programs like 401(k) plans to the tune of 1.5 % percent of our annual gross domestic product. Despite longstanding federal legislative policies, the so-called non-discrimination rules, intended to ensure that these tax-subsidized retirement plans are not biased toward highly paid employees, the defined contribution retirement system is biased in just that way. For the bottom quintile of American workers, their average retirement savings is essentially zero. Even middle-class workers have median savings of around $64,300, which cannot provide for a secure retirement. But workers in the top income bracket have median savings of $605,000. These inequalities are even worse for black families, whose savings average less than half of those of white families.
Employers’ “matching” programs are also biased toward the affluent, with estimates suggesting that 44% of employer subsidies go to workers whose wages are in the top 20% of their workforces. And the failure of 401(k) plan designs to take into account the realities faced by low- and middle-income workers—such as the greater effect of inertia on their investing decisions, their comparative lack of intergenerational wealth, shorter tenures with employers, and the practical reality that they cannot afford to make contributions approaching the federal tax-advantage maximum levels or even take full advantage of employer matching programs—leads to plan designs that exacerbate, rather than ameliorate, the wealth gap. We calculate that if the non-discrmination rules aimed to ensure that retirement plans are structured equitably were applied to the 401(k) system as a whole, the system would fail the test.
In a new article, we make a policy proposal to address this profound problem and to deploy taxpayer-subsidized retirement subsidies in a manner that better serves the many Americans who need greater retirement security. Our proposal combines an increase in the minimum wage, a built-in retirement savings feature, and restructured regulation of employer matching programs. We show that such reforms could partially address the extreme regressivity of 401(k) plans. We then show that these reforms are politically feasible in a fractured partisan landscape because the reforms are rooted in concerns about income and retirement security that are widely shared by Americans of all political persuasions.
We begin by showing how income inequality, combined with the structural aspects of many plans—and matching programs in particular—combine to make retirement plans particularly regressive. Even seemingly equitable approaches, like a standard 1:1 match capped at a percentage contribution, tend to shift value to high-income participants. The non-discrimination rules, which from the beginning have been oriented to avoid top-heavy plans do little to constrain these effects.
Without criticizing more fundamental reform proposals, we advance an incremental, but still, ambitious, proposal to increase retirement security via two mechanisms. First, we propose increasing the capacity of low- to middle-income families to save through a minimum wage increase (including a built-in retirement savings feature). This makes it more feasible for lower income workers to devote responsible sums toward retirement savings. Second, we propose reforms to channel tax expenditures where they are most needed by changing the rules around employer matches to reduce their regressive features. This, coupled with other adjustments to retirement plans aimed to protect low-income workers, ensures that higher-compensated workers at companies do not receive tax subsidies until all their co-workers receive a fair opportunity to save each year.
In our view, a first-best starting point for long-standing reform would involve the following. Upfront we recognize the connection between income and wealth. 401(k) reform would work best in tandem with a federal “minimum wealth” component tied to a percentage of the federal minimum wage that would be required to be contributed to retirement savings. To support increased savings, we advocate an increase in the minimum wage to a real level of $15 an hour over the next five years. That is, a first-best incremental reform would couple a move toward a living wage that includes a dedicated portion for wealth building with a reform to 401(k) itself.
We then advocate reforms to ERISA and federal tax laws to utilize tax incentives in a more equitable manner. ERISA and federal tax reforms that would be valuable even if the minimum wage were not increased. In order to achieve this, our proposed reforms focus on (1) ensuring some employer contribution independent of employee contributions, (2) requiring employers to aggressively match low-dollar contributions, (3) capping matches in dollar amounts rather than percentages of salary, and (4) requiring that these aggressive, low-dollar matches be utilized by a large percentage of employees before employers may engage in discretionary matching. We consider two implementations of the proposals with different caps and amounts, but the general approach is as follows:
- Employees would, as a default matter, be enrolled and participate automatically in their company’s plan.
- The first tranche of employer contributions would be automatic and unconditional. This would give all employees some savings.
- The second tranche of employer contribution would take place at a higher than 1:1 match rate, creating strong incentives for employees to save. Automatic enrollment would ensure that most employees capture this matching value.
- The third tranche would require a 1:1 match by the employer but can involve a higher employer contribution. This aggressive match increases incentives to save and advantages employees unable to make large contributions.
Additional employer match can be on whatever terms the employers choose, but only if a required share of their workforce actually participates in the first four tranches.
Finally, we would restrict vesting of employer match to occur no later than after one year of employment, so that lower wage employees who tend to have shorter employer tenures are not short-changed, as longer vesting schedules now permit.
In our view, this proposal better aligns public policy with bipartisan public sentiment and the public good. We do not eliminate opportunities for higher-end workers to receive tax advantages in the form of employer contributions, or the ability to set aside substantial sums each year on a tax preferred basis. But we do cabin those opportunities and make them dependent on their employers’ provision of sufficient contributions to their more modestly paid colleagues. Our proposal does recognize that tax subsidies are not free, should be equitably distributed, and should be calibrated to do the most good.
Even in a time of sharp political division, there is reason to think our proposal is feasible. In 2024, 79% of Americans believe we are facing a retirement crisis, and 83% think that all workers should have a pension. Another survey found that 56% of Americans feel behind on their retirement preparedness. 80% believe that employers should contribute more to secure retirement. Likewise, strong majorities of democrats, republicans, and independents support substantial increases in the minimum wage, and the minimum wage in several red states now exceeds the federal minimum.
This poll data is not surprising because every aspect of the unequal effect of 401(k) plans has been exacerbated by growing income inequality and the stagnation of real wages for low- and middle-income American workers over the past two generations. As income inequality has grown and wages for lower- and middle-income workers has stagnated, their ability to save for retirement has been compromised. The resulting economic insecurity felt by the many has led to bipartisan interest among elected officials in policy changes that would provide a more realistic and stable way for American workers to build retirement savings.
A recent example of that bipartisan interest is the Social Security Fairness Act of 2025, which extended Social Security benefits to almost three million American workers who had previously been ineligible for it or were limited in what they could collect from it, because they simultaneously participated in public pension plans. The law was adopted with overwhelming Democratic support and substantial Republican support in both houses of Congress: 76-20 in the Senate, 327-75-1 in the House of Representatives.
By offering reforms that restructure, but not replace, the central role of 401(k) plans and the settled expectations they embody, we provide a realistic path for providing more Americans with economic security, closing the growing wealth gap in our society, and creating a greater alignment between the investors in American companies and the employees most responsible for those companies’ success. And if all working Americans from all regions and backgrounds have more economic security and feel that their families have a fair chance for a more prosperous future, then that will help us better remember that what we have in common with our fellow citizens far exceeds our differences.
