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Retirement Planning > Saving for Retirement

401(k) outperforms pension in EBRI study

By Rebecca L. Olgeirson

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Gen X might actually fare better in retirement than their pension plan-bearing parents, according to an analysis by the Employee Benefit Research Institute.

Defying the prevailing wisdom that the demise of defined benefit plans would negatively impact the retirement savings of late baby boomers and Gen Xers, a comparison of DB plans to voluntary enrollment (VE) 401(k) plans yielded some surprising results.

In almost all outcomes investigated in the study, these VE 401(k) plans actually posted higher outcome advantages over the DB options.

Research revealed if historical rates of return are assumed and annuity purchase prices reflect average bond prices over the last 27 years, the VE 401(k) plans posted higher results than both the stylized final average DB plans and the stylized cash balance plan.

For the sake of the study, ERBI ran various “stress tests” on the data — reducing rate of return assumptions by 200 basis points and increasing annuity purchase prices to better reflect current bond rates.

It based its conclusions by looking closely at the “replacement rate,” comparing the defined benefit total with the total accrued 401(k) amount that would used to purchase an annuity.

Among the highest bracket of earners working 21-30 years for a company, the median 401(k) replacement rate was 21 percent greater than DB final income plans.  

For those working for an employer 31-40 years, the median replacement rate was 44 percent greater.

The lowest bracket of earners working for the same employee for 1-20 years saw no difference in plans and for those with 21-30 years of tenure, the median 401 (k) replacement rate was 2 percent. That rate rose to 15 percent only with workers who spent 31-40 years with an employer. 

Only in the situation of lower-paid employees did the DB plans outperform the VE 401(k) counterparts. Even with that sector suffering, the median plan advantages still outperformed. However, it should be noted that lower-paid employees also tend to be least likely to participate in VE 401 (k) plans, according to the study.

“However, when the simulation results are subjected to both of these stresses simultaneously, virtually all of the median differences between the VE 401(k) plans and the stylized, final-average DB plan turn negative regardless of income quartile. Even in this scenario, based on the median differences, virtually all of the participants will do better in the VE 401(k) plans than the stylized cash balance plan,” the EBRI said.

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