In a startling reversal, Alicia Munnell of the Center for Retirement Research at Boston College revealed last month that she’s now on board with 401(k)s, noting that the hit taken by American workers by switching from defined benefit to defined contribution plans isn’t what she once thought.
Now, a new paper from Jack VanDerhei of the Employee Benefit Research Institute reinforces Munnell’s view, writing “it appears that the defined benefit (DB) plan has a higher probability of achieving a real replacement (when combined with Social Security payments) of 60 percent than the voluntary enrollment (VE) 401(k) plans for the first three income quartiles.”
However, he finds that when the threshold is set at a higher (and according to many financial planners, more realistic) replacement rate of 80 percent, “for all groups except for the lowest-income quartile (where the results are virtually even).”
VanDerhei adds that if a 70 percent replacement rate is used as a threshold, participants in the third-and fourth-income quartiles have a much higher probability of success with the 401(k) plans than the DB plans.
The paper, titled “How Does the Probability of a ‘Successful’ Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k) Plans?,” notes of Munnell’s research in arriving at her current view that there “is much to question in the methodology employed in the analysis.”
However, VanDerhei concedes that she is correct in concluding that the nature of the accumulation process has shifted dramatically and that the effect of these shifts “can be identified only by looking at data on individuals as opposed to those from our national accounts,” meaning 401(k)s.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
