The Economic Policy Institute (EPI), a think tank focused on the economic condition of low- and middle-income workers, recently released a study purporting to show that the switch from DB plans to DC plans has increased retirement wealth inequality. While the study acknowledged that assets in IRAs and qualified DC plans as a whole have grown faster than has income over the past two decades, the authors argue that the rich have benefited disproportionately.
While the EPI study paints a picture of a system benefitting the wealthy few, other credible sources show that the current system is fair and works well for participants across the income spectrum. For instance, EBRI found that the ratio of 401(k) account-balance-to-salary for participants in their 60s is relatively flat for participants who earn between $30,000 and $100,000, and actually falls for participants who earn more than $100,000. This analysis makes sense because of the limit on the amount of compensation than can be included in determining benefits for 401(k) plans, the dollar limits on contributions to 401(k) plans and nondiscrimination rules that ensure that 401(k) plans do not disproportionately benefit highly compensated employees.
The EPI study implicitly suggests that defined benefit arrangements for workers are better than defined contribution arrangements. While DB plans remain an effective retirement tool for segments of the working population, EBRI has shown that in some situations, retirement outcomes for participants are better under defined contribution arrangements than under defined benefit arrangements.
Finally, the EPI study notes the declining participation rate under the current system from 2000 to 2010, and suggests that it’s tied to the decline in DB plans. A recent EBRI Notes shows the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP) data has indeed shown a slight decline in participation over the past decade. This data, however, suggests that participation in employer-based retirement plans is dependent upon broad economic conditions in the labor market and is not tied to the decline of DB plans. In fact, as the economy has improved over the past three years, this same data shows that participation in employer-based retirement plans has increased.
Regardless of its limitations, the study does point out the need to provide more opportunities for workplace retirement savings, and to help workers improve outcomes. ASPPA and NAPA will continue our efforts to build on the successes of the current system to do just that.
Andrew Remo is ASPPA’s Congressional Affairs Manager.
