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DC Switch Isn’t Bad for Retirement Savings Rates After All

While there has been no shortage of criticism about the move away from defined benefit plans to defined contribution programs, a relatively common mantra has been that people are saving less for retirement as a result of this shift.

Enter a new admission from none other than Boston College’s Alicia Munnell, who just confirmed that, “Overall, people are not saving less for retirement as a result of the shift from defined benefit to defined contribution plans.”

That is a reversal of position for Munnell, who in a recent MarketWatch post exclaims: “We are going to have to change our story!”

Not to put too fine a point on it, but with that kind of reversal, you might want to check out the ice levels on the River Styx.

Lacking access to a detailed participant dataset, Munnell explains that “…it is possible to get some idea about what is going on by looking at data in the National Income and Product Accounts (NIPAs),” data that are used to show contributions to both DB and DC plans. She acknowledges that tracking contributions to DB plans provides “little information” about pension saving because, when the stock market booms, employers’ contributions can drop to zero as they rely on investment returns to fund accruing benefits. Then in 2013, the government changed accounting for defined benefit plans from a cash basis to an accrual basis, and that meant that, instead of reporting how much an employer contributes to a DB plan, the NIPAs now report how much participants in a plan are accruing in benefits.

Some adjustments were made to the raw data: They standardized for declining interest rates over time and moved to what Munnell described as a “broader definition” of pension liability. On the DC side, they took rollovers from the contribution data and took account of leakages.

And while these adjusted data show that, on balance, the decline in DB plan accruals has not been fully offset by rising contributions to DC plans, Munnell explains that contributions don’t tell the whole story. “When returns on accumulations are added to contributions, the annual change in pension wealth appears to have remained relatively steady over time,” she says — though she caveats this positive conclusion by noting that this “…reflects that individuals covered by 401(k) plans have taken more risks than participants in DB plans, and the high returns associated with risky investments have produced substantial asset accumulations.”[1. See also, How Has Shift to Defined Contribution Plans Affected Saving?]

Munnell may have lacked access to a detailed participant dataset, but a couple of years back the Employee Benefit Research Institute published an analysis of a direct comparison of the likely benefits under specific types of 401(k) plans and DB plans.

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