Whether a defined benefit plan or defined contribution plan is the best source of retirement savings depends on the desired salary replacement ratio, said research published Wednesday by the Employee Benefit Research Institute.
For example, EBRI found through economic modeling that voluntary enrollment 401(k) plans provided a better opportunity for achieving an 80% salary replacement ratio than DB plans for three of four income categories. In the fourth category — for the lowest-income participants — “the results are virtually even,” the research report said.
The report noted that an 80% salary replacement ratio — retirement savings plus Social Security — is, “to many financial planners,” a more realistic rate than the 70% ratio and the 60% ratio also studied by EBRI.
At the 80% level, 401(k) plans “have a much higher probability of success” than their DB plan peers for the three highest income groups, the report said.
However, if the replacement ratio is 60%, the DB plan “has a higher probability of achieving a real replacement” than the 401(k) plans for three of four income groups, the report said. Only the highest income group has a better chance of achieving an adequate replacement ratio through a 401(k) plan vs. a DB plan, the report said.
At the 70% level, the two highest income groups have a better chance of retirement success with a 401(k) plan while the two lower income groups have a better chance with a DB plan.