In light of ERISA’s 50th anniversary this year, a new paper by Morningstar highlights how the evolving retirement plan industry could impact defined contribution (DC) plans.
The paper points to significant shifts in the industry, like the change from public defined benefit (DB) plans to DC models, for its implications on retirement income adequacy.
Specifically, using the Morningstar Model of US Retirement Outcomes, the research firm notes that continuous participation in DC plans, coupled with automatic enrollment and escalation features, are critical to ensuring a successful retirement among participants. According to Morningstar, the model uses a retirement-funded ratio metric to assess financial sufficiency in retirement.
“This comprehensive analysis provides valuable insights for policymakers, plan sponsors, and individuals, emphasizing the need for thoughtful policy interventions and robust retirement plan designs to secure better retirement outcomes,” Morningstar writes in its report.
Morningstar’s paper starts with a review of retirement-income adequacy prospects for workers by summarizing their probability of a successful retirement, and shows how age cohort, career average income quartiles, gender and family status, race and ethnicity, industry, and future years all contribute to positive long-term.
For example, Morningstar’s findings indicate that Baby Boomers and Gen Xers are more likely to face retirement shortfalls than younger generations. Forty-seven percent of Gen Xers are projected to experience shortfalls compared with 37% for Gen Z and 44% for Millennials. Single women, Hispanic Americans, and non-Hispanic Black Americans were also at a higher risk of retirement shortfalls, Morningstar found. In terms of retirement preparedness, public sector workers were likelier to be more prepared for retirement compared to professionals in industries like finances, insurance, real estate, and manufacturing.
Morningstar’s analysis then examines how different the prospects for retirement-income adequacy would be for today’s workers if DC plans and individual retirement accounts (IRAs) did not exist. In its findings, Morningstar reports that those with 20 or more years of future DC-plan participation are much less likely to run short of money compared with those with no future participation—therefore emphasizing the importance of sustained contributions to DC plans.
Even those without a DC plan, but who are enrolled in IRAs, were likelier to sustain higher savings, Morningstar found. “The simulation of this proposal showed significant increases in wealth ratios for participants, particularly for those simulated to have no future years in a DC plan,” Morningstar wrote. “This suggests that such policy changes could significantly improve retirement outcomes for a broad segment of the population.”
Finally, Morningstar’s analysis explored the potential benefits of moving from voluntary enrollment plans to automatic enrollment and escalation features, finding that such a change could lead to further increases in wealth ratio. According to the findings, transitioning to an automatic enrollment plan with a 15% auto-escalation cap could grow average wealth ratios by 28.8%.
“Our analysis highlights the importance of continued participation in DC plans, the potential benefits of automatic enrollment and auto-escalation features, and the positive impact of policy proposals like the Automatic IRA Act of 2024…,” concludes Morningstar. “As we look to the future, it is essential to consider these findings in shaping policies and plan designs that promote retirement-income adequacy and financial security.”
More information on Morningstar’s findings can be found here.
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
