401(K) and Traditional Pensions: Not as Different as you may have Thought

A new study has shown that defined contribution plans contribute about the same level of asset accumulation as traditional pension plans.
Critics have long cited the shortfalls of 401(k) plans—inadequate savings, asset leakage from the DC system, insufficient plan coverage, and racial/ethnic disparity in plan participation are just a few of the commonly referenced problems with this retirement planning account.
Now, there’s a new paper that’s been co-authored by the director of the Center for Retirement Research at Boston College indicates that people who stashed monies away in a 401(k) plan receive an equal amount of retirement benefits as they did in the days of the defined-benefit pension plans—the former pension plan– retirement savings account of choice among employers. This is a bit of an about face for the center, as they have long held the stance that people are saving less because of a cultural shift from DB (pension) to DC (401(k)) retirement savings plans.
Factoring in investment returns and plan contributions, the annual change in pension wealth remained pretty steady from 1984-2012—a range of 13% and 15%, the data from the study shows.
The popularity of 401(k) plans spun off in the early 80’s and were quickly adopted by employers over traditional DB plans as the primary retirement savings account offered to employees.
This transition happens at a time when the workforce is becoming increasingly mobile—employees favor 401(k) savings that employees are able to take with them from job to job. The DB system works well in days of the past—a world where employees stay with one employer their whole life.
Retirement planning advisers have long placed major emphasis on savings plan design and features to drive better behavior with participants, with a general aim of a total participant savings between 10%-15% as a goal.
Even if critics soften their claims on DC asset accumulation, there are plenty of other flaws in this retirement planning vehicle—offloading risk onto employees, lack of coverage in the private sector, and the problem of leakage from plans when employees take loans and cash out after they get a new job are all still flaws in the system that need to be addressed to shore up participant retirement savings behavior.