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.