In their new book, "Coming Up Short: The Challenge of 401(k) Plans," Alicia H. Munnell and Annika Sunden ask a key question: Are workers better or worse off as a result of the shift to 401(k) plans from defined benefit plans?
Their answer will astound both critics and supporters of the shift.
The authors conducted simulations that led them to contend: The "employee appears to do somewhat better under a typical 401(k) plan than under a traditional defined benefit plan. More sophisticated analyses that incorporate the variability in plan provisions, earnings profiles, and rates of return yield similar results."
But they qualify their findings, noting that "accumulations in 401(k) accounts are significantly less than the simulations suggest…" — closer to a pension wealth of 2.9 times earnings for a worker earning $52,650, compared to a pension wealth of 6.7 times earnings, or $355,000, generated by the simulations.
In other words, "simulations suggest that workers have the potential to do better under a 401(k) plan than under a typical defined benefit plan," if, as the title of their final chapter suggests, everyone will start "making pension plans do their job "
The book, published by Brookings Institution Press, Washington, is written in an engaging, accessible style and is a valuable, succinct monograph for plan sponsors and policy-makers.
Ms. Munnell is the Peter F. Drucker Professor of Management Sciences at the Carroll School of Management of Boston College and director of its Center for Retirement Research. Ms. Sunden, a research associate at the center, is also a senior economist at the Swedish National Social Insurance Board.