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Defined Contribution

401(k) plans rival pension funds for retirement income — report

Participants in corporate 401(k) plans could have retirement incomes comparable to those enrolled in active defined benefit plans, according to modeling from the non-profit Employee Benefit Research Institute.

Using EBRI's retirement security projection model, EBRI Research Director Jack VanDerhei updated modeling created in 2013 for 401(k) plans with voluntary enrollment to include 401(k) plans with automatic enrollment.

"Let's say you had exactly the same people with exactly the same wages and exactly the same job turnover but instead of being eligible to be in a (401(k)) plan, let's assume they were in a final average defined benefit plan," Mr. VanDerhei said in a telephone interview. "Each of these people will be in a final average DB plan with a 1.5 % final average accrual pay and I compare to what they actually had with the (annuitized 401(k) plan at age 65)."

The study also assumes historical rates of return and annuity purchase prices reflecting average bond rates from 1986 to 2013 and measures the percentage accrual rate required for a DB plan to generate the same retirement income that is projected to come from 401(k) plan participation by any given category of workers. In the report, which features 16 combinations, only two have a defined benefit rate less than 1.5% of final pay per years of service among men and only five have those rates among women.

When parameters are changed to use current annuity purchase prices and reduced rate of return assumptions by 200 basis points, however, 401(k) plans lose their competitive advantages to DB plans, the report noted.

The issue brief is available on EBRI's website. Registration is required.