Focusing on employees who are eligible for participation in
a retirement plan for at least 30 years, the Employee Benefit Research
Institute (EBRI) found that a final-average defined benefit (DB) plan with an
accrual rate of 1.5% is more likely to provide “successful” outcomes for
lower-income workers when the employer-provided retirement benefits are added
to the expected Social Security benefits.
However, as income increases, a voluntary-enrollment 401(k)
plan has a higher probability of producing a successful outcome than this type
of defined benefit plan. A voluntary-enrollment 401(k) plan is even more likely
to produce a successful outcome than the final average defined benefit plan
when “success” is defined as a real replacement rate greater than 60% of
For the analysis, EBRI conducted projections for the
percentage of “successful” retirements for 401(k) participants, by income
quartile, for those currently ages 25 to 29 in a voluntary-enrollment 401(k)
plan. The analysis assumes that workers retire at age 65, and that all balances
are converted into an inflation-adjusted annuity at an annuity purchase price
of 18.62 at that point. The annual income provided by this annuity in the first
year of retirement is added to the simulated Social Security retirement benefit
provided for the worker (spousal benefits are not included), and the combined
retirement income is expressed as a percentage of the salary the worker was
simulated to have earned at age 64.
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For the lowest-income quartile, EBRI found 86% of the
workers currently ages 25 to 29 who will have more than 30 years of eligibility
for participation in a voluntary-enrollment 401(k) plan are simulated to be
able to replace at least 60% of their age-64 salary from their annuitized
401(k) accumulations and Social Security. In contrast, if these same workers
(with similar wage and job turnover) are in a final-average DB plan with a 1.5%
accrual rate, the probability of “success” increases to 99%. This differential
in favor of this specific type of DB plan remains positive for the second- and
third-income quartiles (97% vs. 83% and 92% vs. 84%, respectively); however the
probability of success is much higher for the highest-income quartile under
voluntary-enrollment 401(k) plans (84%) than for the DB plan (57%).
When the definition of “success” is a 70% pre-retirement
income replacement, the lowest-income quartile still has a higher probability
of success with the DB plan, and the second-income quartile has a slightly
higher probability of success with the DB plan, but the third- and
highest-income quartiles have a higher probability of success with the 401(k)
Finally, defining “success” as replacing 80% of
pre-retirement income in retirement, the analysis found the 401(k) plan has a
much higher probability of success than the DB plan for all groups except the
lowest-income quartile, for which the probability of success is virtually even
for the 401(k) and the DB plan.
EBRI notes that a recent analysis from the
Center for Retirement Research at Boston College found the shift to workers
mostly being covered by defined contribution (DC) plans rather than DBs has not
resulted in less retirement savings.
EBRI’s full report is published in the October 2015 EBRI
Notes, “How Does the Probability of a “Successful” Retirement Differ Between
Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment
401(k) Plans?” available online at www.ebri.org.