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What 401(k) Savers Don’t Know About Their 401(k)s

A surprising survey from the founders of an AI-focused 401(k) firm


After spending the past few years building Dream Forward, a financial firm selling 401(k) plans with the first artificial intelligence (AI) chatbot dedicated to retirement, we thought it would be interesting to track the most common questions we heard from employees.

We were surprised by the results. (The full report is in our whitepaper Retirement 2058: What Artificial Intelligence Reveals About 401(k) Plans.)

A Wrong Assumption About 401(k) Questions

We assumed that most of the questions our AI would receive would be around helping employees make investment choices or deal with competing financial goals. That assumption was incorrect.

We were shocked by how many of the questions revolved around the basics of 401(k)s and financial jargon.

It turns out, the complex nature of 401(k) accounts are a much bigger barrier to saving for retirement than financial experts realize. Based on our chatbot, we’ve noticed a large disconnect between the way 401(k) plans are designed and the average American’s knowledge of financial terminology.

Questions about tax rules, 401(k) basics and financial terminology account for about 63 percent of the questions our AI receives. They were things like: How much money do I need to save to get a match? How does my money get from my paycheck into this account? How does the 401(k) impact my taxes?

The other questions dealt with financial planning and investing.

The Commonly-Held Retirement Savings Narrative

When America’s retirement crisis is discussed in the media, the focus tends to be on macroeconomic trends such as the decline of pension benefits or stagnate middle-class wage growth. These trends are blamed for the average American’s underfunded retirement nest egg. We believe this commonly-held narrative doesn’t tell the full story.

The data from Dream Forward’s proprietary AI paints a different picture.

The structure and complexity of 401(k) accounts are just as big of a problem for employees as the macroeconomic trends that affect America’s retirement system.

Here’s an example of the mind-numbing complexity of the American retirement plan system. Take a question as simple as: “How do I get my money out of my 401(k)?

Getting Money Out of a 401(k): Maddeningly Complex

Depending on the 401(k) plan’s rules, an employee will have to navigate some combination of: in-service withdrawals, 401(k) loans, how to avoid early withdrawal tax penalties, qualifying for hardship withdrawals, in-kind distributions and more.

Participants really struggle to wrap their heads around the pros and cons of the multitude of withdrawal options.

Let’s contrast the challenges of 401(k)s with the pension system 401(k)s have gradually replaced. What really made the traditional pension system work was that pensions were a mandatory savings program. Even if leadership promised unrealistic pension benefits based on rosy assumptions, there was at least some money being saved towards retirement.

We’ve now mostly transitioned to 401(k)s, where saving is completely voluntary. And the uncomfortable truth is that a voluntary system isn’t working.

Short of going back to a mandatory system — something that seems highly unlikely  — the next best thing is to try to redesign 401(k)s around getting people to save more.

3 Badly Needed Changes for 401(k) Plans

Here are three badly needed changes to make 401(k)s more effective:

Many of the AI’s questions pertain to help with rollovers. Consumers especially need help with the paperwork needed from the prior 401(k) provider that holds the account they’d like to roll over. We see this pain point across all ages and income levels. Other countries (like Australia) have passed legislation to make the rollover process much more streamlined. The United States needs to update the rules and regulations around rollovers.

Overly complex regulation and jargon intimidates employees. This is especially problematic at the lower end of the income spectrum. The United States needs to drastically simplify 401(k) rules and regulations or build tools to help overcome the barriers caused by them.

Proactive, automated outreach is the key to improving outcomes. Without the AI intervening, users were all too happy to speed through the enrollment process, ignore warnings and prompts and make a suboptimal decision for their long-term finances. Technology needs to proactively reach out and talk to users during critical decision points.

We recently passed the 40th anniversary of 401(k) plans. Here’s hoping the next 40 years leading up to November 6th, 2058 see modernization and transformation so Americans can improve their chances for a comfortable retirement.

By Grant Easterbrook and Brendan Sweet
Grant Easterbrook is co-founder of Dream Forward, a  401(k) plan provider with a the first AI chatbot dedicated to retirement. He was formerly an analyst in the fintech sector. Brendan Sweet is co-founder of Dream Forward. Grant can be reached via email at [email protected]. Previously, he worked in consulting and strategy roles for some of the largest financial institutions in the world.  Brendan can be reached via email at [email protected].@Eastertweet

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