Skip to main content

You are here

Advertisement

DC Beats DB – For the Most Part

Which provides a better retirement income outcome, defined benefit or defined contribution? A new analysis provides results that might surprise some.

The answer, of course, is dependent on assumptions – assumptions that determine the benefits accrued, as well as the threshold of success – how much you have versus how much you will need.

The most recent analysis, by the nonpartisan Employee Benefit Research Institute (EBRI), employed certain specific assumptions about benefit crediting rates of a defined benefit design, as well as interest rates and service credits. Focusing on employees who are eligible for participation in a retirement plan for at least 30 years, EBRI found that a final-average defined benefit (DB) plan with an accrual rate of 1.5% is more likely to provide “successful” outcomes for lower-income workers when the employer-provided retirement benefits are added to the expected Social Security benefits. That said, the difference is that while the DB structure provides a successful outcome for 99%, the DC structure – and mind you, the analysis focused on voluntary, not automatic, enrollment plans – means success for the vast majority (86%) as well.

Moreover, as income increases, a voluntary enrollment 401(k) plan has a higher probability of producing a successful outcome than this type of defined benefit plan and is even more likely to produce a successful outcome than the final average defined benefit plan when definition of “success” is defined as a real replacement rate greater than 60% of their pre-retirement income.

Using a 70% replacement rate as the goal, participants in the third and fourth income quartiles have a much higher probability of success with the 401(k) plans than the DB plans. When the threshold is set higher – to a replacement rate of 80% – the 401(k) plans have a much higher probability of success than the DB plans for all groups except for the lowest income quartile (where the results are virtually even).

So, for those looking to enhance their retirement success odds, eligibility for a DC plan seems to be a good place to be.

Advertisement