Pension Plans Cheaper than 401ks, Report Argues

Defined benefit pension plans

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Defined benefit (DB) pension plans outshine 401k and similar defined contribution (DC) accounts, at least with cost, according to a new report from the National Institute on Retirement Security (NIRS).

The analysis finds that a typical pension has a 49% cost advantage when compared with a typical DC account, with the cost advantages stemming from longevity risk pooling, higher investment returns, and optimally balanced investment portfolios.

Dan Doonan

NIRS claims the analysis also indicates that about four-fifths of the cost difference occurs during post-retirement years.

Once retired, individuals typically experience substantially higher fees when retirement assets are withdrawn from a workplace retirement plan. Also, retired individuals often shift their savings to lower risk, lower return asset classes, which is further complicated by today’s historically low interest rate environment, the report, A Better Bang for the Buck 3.0: Post-Retirement Experience Drives the Pension Cost Advantage, revealed.

“Pensions have economies of scale and risk pooling that just can’t be replicated by individual savings accounts,” co-author Dan Doonan, NIRS executive director, said in a statement. “This means pensions can provide retirement benefits at a much lower cost. At the same time, 401ks have made significant progress in recent years when it comes to reducing costs and making investing easier for individuals. But the post-retirement period remains difficult to navigate for those in a 401k account.”

The cost differences are a key consideration for employers and policymakers, given that most Americans are apprehensive about retirement, and retirement savings levels, he said, are dangerously low.

Specifically, the analysis indicates that to achieve roughly the same target retirement benefit to replace 54% of final salary, a DB pension plan requires contributions equal to 16.5% of payroll. In contrast, an individually directed DC account requires contributions almost twice as high as the DB plan, at 32.3% of payroll.

Key findings include:

THE FULL REPORT IS FOUND HERE

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