Do we really need 401(k)s and similarly designed employee-retirement plans? Is there anything better? What would happen if they disappeared altogether?
Bad things, of course, but the Employee Benefit Research Institute does the math.
As expected, younger workers are hurt worse than their older counterparts, but it’s general mayhem for all.
If defined contribution retirement plans were eliminated entirely, “the youngest age cohort (those currently ages 35–39) would suffer the most, with average retirement deficits increasing 23% from $49,182 to $60,253,” EBRI’s Jack VanDerhei writes.
Older cohorts would experience less of an impact.
“Those ages 40-44 would have an increase of 18%, while those ages 45-49 would have a 13% increase. The average deficits for households above age 50 would increase but by less than 10%.”
The reason for the analysis, VanDerhei explains, is a number of recent policy proposals “that call into question the value of existing defined contribution plans, yet the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households.”
In 2017, EBRI produced “simulation results” showing that, if employer-sponsored retirement plans went completely away, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71%).
Flip side
But the brief then flips, and examines the issue from the opposite direction, assuming every employer were to sponsor a defined contribution plan.
“Again, in this scenario, the youngest age cohort and single females would experience the largest change in retirement income adequacy,” EBRI finds.
The youngest age cohort would benefit the most from this scenario, with average retirement deficits decreasing 24% from $49,182 to $37,506.
Older cohorts would experience less of an impact: those ages 40–44 would have a decrease of 19%, while those ages 45–49 would have a 16% decrease and those ages 50–54 would have a 12% decrease.
The average deficit for households above age 55 would decrease but by less than 10%.
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.
