New research from the Employee Benefit Research Institute (EBRI) shows that being eligible to participate in a defined contribution retirement plan is a key factor in whether employees will have enough money to afford basic expenses and health care in retirement.
The EBRI research finds that the "at-risk" level declines the longer workers are eligible to participate in a work-based defined contribution (DC) retirement plan.
For example, consider Gen X households in the second-to-lowest income bracket: 58 percent of these households eligible for defined contribution plan participation less than one-quarter of future working years would be at risk at least 50 percent of the time, compared with only 21 percent for those eligible for DC plans in least three-quarters of future working years.
“The results, especially for lower-income households, are due in large part to the importance of automatic enrollment and automatic escalation of contributions for 401(k) plans in future years,” said Jack VanDerhei, EBRI research director, in a statement.
The EBRI notes that retirement income adequacy in the future depends on a number of key factors, including: assumed retirement age, participation rates, employee contribution rates, employer matching formula, employer nonelective contributions, asset allocation, job turnover, cashout rates, and rates of return. However, according to the research, a crucial factor in workers’ ability to achieve future retirement income adequacy is their eligibility to participate in a defined contribution plan.
The report also found that there are different percentage levels for each income group where DC plans make the most difference. For example in the lowest-income cohort, the major difference is seen at the 50 percent and 30 percent thresholds, but in larger income groups, the beneficial effect of DC plan eligibility has a much wider range.
According to EBRI, the study has major implications for any policies that would decrease the percentage of workers eligible to participate in defined contribution retirement plans. If employees are not eligible to participate in DC plans, they may not be as prepared for retirement.
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