If workers are going to have a shot at a secure retirement, their defined contribution plans need to start working more like defined benefit plans.
Otherwise, workers are at a greater risk of falling into poverty as they age.
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Those are some of the findings of a new paper from the Center for Retirement Research at Boston College, which looked at various options for retirement funds selected by workers and how those options played out during retirement.
According to the study, workers who are more likely to end up in poverty as they age, or to push surviving spouses into poverty, are those who make choices such as the ones below.
These choices cut the amount of money they'll receive during retirement:
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Taking a lump-sum distribution before they retire
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Not choosing (or not having the option to choose) to annuitize their DC benefits
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Picking a single-life annuity instead of a joint-and-survivor option
DB plans were traditionally structured in such a way that they precluded some of those choices, so that when people made it to retirement their families had a more secure source of income.
For instance, DB plans "restricted the ability of pension holders to take lump-sum distributions, were automatically annuitized, and were legally required to default the worker into joint-and-survivor coverage to ensure that the annuity continued to pay the surviving spouse after the worker's death."
In contrast, DC plans allow people to take lump-sum distributions, even though a penalty is involved if such a distribution is taken before age 59 and a half.
Annuitizing the proceeds isn't generally an option, so the worker can't opt for the choice of a lifetime income.
And even if a DC plan is annuitized, there may be no joint-and-survivor option, so the surviving spouse could be left penniless on the death of the worker.
The study's authors said, "[T]he distribution provisions in DC pension plans are … critical factors in evaluating the risk of falling into poverty in old age."
Looking at sample households aged 65–69 and 75–79, and taking into consideration the provisions governing their retirement income, the study found that "[h]aving DB pension coverage is associated with a statistically significantly lower risk of having income that falls below any of the income poverty thresholds."
In addition, lump-sum distributions "are positively correlated with having income below each poverty threshold," and households in the older age group in which the deceased spouse had been collecting an annuity that ended with the spouse's death are also "statistically significantly more likely to have income below each poverty threshold."
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