By Pension and Benefits Editorial Staff
According to recent research from the Employee Benefit Research Institute, employees with automatic enrollment 401(k) plans can end up with more retirement income than those with final-average defined benefit (DB) plans. The research, How Much Would It Take? Achieving Retirement Income Equivalency Between Final-Average-Pay Defined Benefit Plan Accruals and Automatic Enrollment 401(k) Plans in the Private Sector, used EBRI’s Retirement Security Projection Model to compare simulated retirement benefits available under 401(k) plans with automatic enrollment relative to benefits available from a counterfactual simulation of a high-three-year, final-average-pay DB plan.
The research found that, all things equal, DB plans would typically have to accrue at more-generous rates to “break even” with auto-enrollment 401(k) plans. For example:
- In its baseline case, EBRI found that the defined benefit “break-even” rate—or the percentage accrual rate that would be required in order for a final-average DB plan to generate the same retirement income that is projected to come from 401(k) plan eligibility under automatic enrollment for a given worker cohort—are rarely less than 1.5 percent of final pay.
- In only two of the 16 combinations of wage quartiles and years of plan eligibility for males are defined benefit “break-even” rates less than 1.5 percent of final pay per years of service.
- For women, only five of the 16 combinations have “break-even” rates under 1.5 percent.
“EBRI’s modeling results show a strong advantage for automatic enrollment 401(k) plans over final-average defined benefit plans under this scenario,” said Jack VanDerhei, EBRI research director. “However, when subjected to various ‘stress tests’ this can change.” VanDerhei notes that, for example, by reducing the rate of return assumptions by 200 basis points and increasing the annuity purchase price to reflect recent bond rates, results show that in many cases the automatic enrollment 401(k) plans lose their comparative advantage to the final-average defined benefit plans.
VanDerhei points out that this research is important because “in considering shifts in plan availability and design, plan sponsors, providers, and policy makers naturally look for comparisons in the outcomes provided. Unfortunately, the comparisons are frequently limited by a paucity of real-world data.”
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