Economists Predict Bright Future for 401(k) Wealth

A research paper authored by a trio of university economists argues that most of the concerns that Americans’ retirement savings are insufficient to pay for their golden years are overstated.

A Dartmouth University news release said the study found that 401(k) wealth will continue to grow and that a financial market meltdown is unlikely despite the sometimes gloomy forecasts to the contrary.

According to the study, for example, retirees in 2040 are expected to have five times as much 401(k) wealth as retirees in 2007 in constant dollars. Also, the economists claim that even as the baby boomers retire, asset growth generated by the rise of 401(k) plans will be more than enough to offset asset decreases from them not having a defined benefit pension.

Within the next few years, the value of benefits provided by 401(k) plans at retirement will already be greater than the value of traditional pension benefits, the researchers said. Specifically, the researchers projected that value of 401(k) assets at retirement will surpass the present value of DB pension benefits between 2010 and 2013. They said the value of 401(k) assets “substantially exceeds” the value of defined benefit payouts by 2030 or 2040.

“Overall,” Dartmouth economist Steven Venti said, in the news release, “the pension sector will not be a major drag on asset markets and a financial meltdown is highly unlikely.”

The study was conducted by Venti and economists James Poterba of MIT and David Wise at Harvard University and included projections of future levels of retirement wealth. The three developed a model of the retirement saving sector that accounts for the changing nature of pensions and the aging of the population, according to the announcement.

On the downside of the retirement picture, Venti said 401(k) plans may be almost universal at large employers, but are poorly utilized by small employers. It is difficult to determine whether or how quickly 401(k) plans will spread to more small employers in the future, a situation which means that not everyone will share in rising retirement wealth, he said.

Another uncertainty, he said, is that rates of return may be significantly lower in the future.

The researchers explain in the study that they assumed that Americans would spend down their 401(k) assets slowly. Other assumptions included:

  • “a long working life with 401(k) coverage”
  • a 10% deferral rate; and
  • “The significant compound returns available on both stock and bond investments generate substantial 401(k) balances for the younger cohorts that offset 401(k) withdrawals by older workers,“ the researchers wrote.

The researchers also noted in the study that their 401(k) behavior data ends in 2003 and that everything after that is based on their projections.

The research was published the week of August 6-10 in the Proceedings of the National Academies of Sciences.