EBRI: Participants Do Better in DC Plans

The conventional wisdom today is that DB and the relatively new cash balance plans are better than DC plans like 401(k)s. But according to research by EBRI based on a variety of simulated analyses, participants do better in a 401(k) plan than in a DB or cash balance plan.

The analysis assumed historic rates of return over the past 27 years and the current price of annuities. However, 401(k)s lose their competitive edge against DB plans for lower paid employees if returns are reduced by 200 BPs and annuity prices are raised — but they still beat cash balance plans.

People also tend to forget that DB coverage was less than 50% even at its height, with fewer and fewer people staying at their job long enough to get a real benefit.

There are a lot of surveys out there – we read them all. Provider-funded research about their own products or types of service is obviously less trustworthy, as are findings from think tanks with an ax to grind. And pure academic studies on DC plans seem to be few and far between. But EBRI is one of the most trusted sources in the retirement and benefits industry, not only because of their unbiased position but also because of their access to data from more than 60,000 plans and 24 million participants.

Maybe now we can move on to trying to figure out how to make DC plans better, rather than bemoaning the loss of the DB world or trying to bring it back under government supervision.

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