Americans now have much more money in IRAs than 401(k)s. Why that leaves workers more vulnerable.

Alicia H. Munnell

Wed, February 11, 2026 at 11:16 PM GMT+9 3 min read

• Getty Images

The most extraordinary development in the U.S. private-sector retirement system is not the shift away from old-fashioned defined-benefit plans that began around 1980 and is virtually complete today.

Instead, it’s the movement away from 401(k) plans, which replaced the defined-benefit plans, and toward individual retirement accounts. Total IRA assets now exceed the amount in 401(k) plans by $7 trillion (see Figure 1).

Most Read from MarketWatch

The U.S. bond market is suddenly flashing a warning sign about the economy

I’m 59, earning six figures, but my daughter wants me to retire to watch my future grandkid for a year. Can I afford it?

The S&P 500 just accomplished a first-time feat — and it suggests more wild swings ahead

‘It’s not a sign that it’s going well.’ The median amount American workers have saved for retirement is $955.

My wife and I have $2.5 million, but not much in Roths. Should we do a mega backdoor conversion?

The shift from 401(k)s to IRAs moves employees’ money to a different regulatory environment. The Employee Retirement Income Security Act of 1974, which covers 401(k) plans, requires plan sponsors to operate as fiduciaries who always act in the best interest of plan participants.

In contrast, the standards of conduct for broker-dealers selling IRA investments are much less protective than the ERISA fiduciary duties of loyalty and prudence, which have consistently been characterized by the courts as “the highest known to the law.”

In addition, in the 401(k) environment, much greater emphasis is placed on the disclosure of fees in an understandable format than is the case for IRAs. And most important, 401(k)s place much more emphasis than IRAs on keeping the funds in the plan until retirement.

Virtually all withdrawals from 401(k) plans and traditional IRAs made before the employee reaches age 59½ are subject to a 10% penalty tax (in addition to federal and state income taxes). Exceptions include distributions for large healthcare expenses, for hardship caused by permanent and total disability and for periodic payments over a lifetime.

IRAs, however, allow withdrawals for three additional reasons: to cover postsecondary-education expenses; up to $10,000 to put toward a new home purchase; and, for people who are unemployed for 12 or more weeks, to pay medical-insurance expenses.

In addition to the exemptions from the 10% penalty tax, the barriers to accessing funds are much lower in the case of IRAs than 401(k)s. Importantly, 401(k) withdrawals can be made only at the time of a job change or for reasons of hardship, while IRA withdrawals can be made at any time and without justification.

Story Continues  

Moreover, 401(k) hardship withdrawals involve interactions with plan administrators, the filing of paperwork and, at least in theory, a justification for the withdrawal. The emotional and practical burden of this multistage process may discourage withdrawals. In contrast, the providers of IRAs generally do not discourage withdrawals prior to retirement age.

And finally, Congress in 1992 imposed a 20% withholding on money taken out of a 401(k), but no such withholding exists on IRA transactions.

The growing role of IRAs has resulted in a much less effective retirement system. Without fiduciaries serving as a buffer between the participant and the market, investments will be suboptimal. With many more options for withdrawing money from accounts, leakages will increase. In addition, IRAs offer less protection than 401(k)s. They protect fewer assets in the event of bankruptcy or litigation and offer less assurance for spouses: The 401(k) designates the spouse as the default beneficiary, requiring notarized consent to name someone else, while an IRA allows the owner to name any beneficiary.

Wise people used to think that ERISA was cool because it protected the benefits of participants in workplace retirement plans. Even those who agree that its administrative burden and costs may have contributed to the demise of defined-benefit plans still laud its protections.

Shouldn’t we care that only 45% of assets in the private sector are protected by ERISA? And what should we do about it?

Most Read from MarketWatch

‘I feel the clock ticking’: My wife and I are in our 60s — and employ 48 people in a small town. Can we ever retire?

My brother refuses to sell our family’s $150K lake house, yet I pay all the bills. Do I push it and risk ruining our relationship?

The first five years of retirement are crucial. Watch out for the ‘thieves’ of retirement wealth.

Morgan Stanley just pored over 3,600 stocks and says these are the best opportunities from the AI shakeout

Why the S&P 500 still can’t manage to close above 7,000

Terms and Privacy Policy

Privacy Dashboard

More Info