The country-wide shift from defined benefit plans to defined contribution plans is not resulting in less accumulation of retirement assets, according to a new paper from the Center for Retirement Research at Boston College.
That conclusion directly contradicts the retirement think tank’s long-standing thesis—that the nation has become less prepared for retirement as more workers have been moved into 401(k) plans.
The Center and its director, Alicia Munnell, have been producing data for years showing that the shift to 401(k) plans was resulting in less retirement savings. Munnell was the lead author of the most recent report.
The new paper looks at data on defined benefit accrual rates from the National Income and Product Accounts between 1984 and 2012 and compares those rates with defined contribution assets over the same period.
Munnell and her team of researchers conclude that the percentage of deferrals of total salaries has slightly declined over time as more sponsors shifted to defined contribution plans.
But that simple comparison doesn’t provide a full picture. The researchers then set out to assess returns on those deferrals.
Because more 401(k) and defined contribution assets were invested in equities throughout the period, the total annual change in pension wealth has been relatively steady, meaning the shift to DC plans has not led to less total saving.
“We are going to have to change our story,” write Munnell and the two other researchers.
In 2012, total savings to retirement plans—from both DC and DB forms—was about 14 percent of wages after accounting for investment gains in both types of plans, down from its peak in 2008 and up slightly from 1984.
Defined contribution assets accounted for about 10 percent of that, after factoring for investment gains, while defined benefit plans accounted for about 4 percent.
The average annual DC plan contribution rate was about 4 percent in 2012, about twice as much as it was in 1984. That figure does not account for investment gains that the researchers say must be factored when comparing defined contribution and defined benefit models.
“Contributions do not tell the whole story,” write the researchers. “Pension wealth also goes up by the return on accumulations.”
The researchers applied an annual rate of return of 5.5 percent to accruals in both types of plans and factored accrued liabilities sponsors carry in defined benefit plans.
When accounting for those returns, the overall accrual rate has remained steady since 1984.
“This pattern reflects the large defined contribution accumulations as a result of the prolonged bull stock market during the 1990s and the strong rebound since the financial crisis,” the report concludes.
It also proves that 401(k) investors take more risks with contributions than have defined benefit participants. “The high returns associated with risky investments have produced substantial asset accumulation,” said Munnell and her team.
The report notes that the shift to defined contribution plans has meant sponsors have moved investment and mortality risk to individuals.
Those consequences can only be measured on an individual basis, claims the report.
Nonetheless, the report’s primary conclusion—that the accumulation of retirement assets has not declined as a result of the shift from defined benefit to defined contribution plans—will no doubt be welcomed by 401(k)-style savings advocates.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
