Stop Blaming the 401(k)
In a recent article, Don’t blame the 401(k), ERISA/ retirement plan attorney, Ary Rosenbaum, spoke out against the popular notion that 401(k) plans are to blame for the lack of retirement savings or the death of defined benefit plans as a savings vehicle for private employers:
“I think [defined benefit plans] were going to be phased out eventually because employers were tired of paying for the retirement benefits of their employees. People don’t want to mention this, but one of the biggest problems that defined benefit plans and Social Security have is that people live longer now… when [Social Security] was created to provide benefits for retirement at age 65 in the 1930s, the life expectancy was 64. The same can be said for defined benefit plans.”
In fact, a 2015 Planadviser article, 401(k)s May Result in More Successful Retirement than DBs, highlights research conducted by the Employee Benefit Research Institute (EBRI), which concludes that successful retirement outcomes “depend on an employee’s salary level and the level of pre-retirement income to be replaced.” So, what were the findings as they relate to 401(k) plans and DB plans?
When defining ‘success’ as the replacement of 70% of pre-retirement income, the lowest-income quartile still has a higher probability of success with the DB plan, and the second-income quartile has a slightly higher probability of success with the DB plan, but the third- and highest-income quartile has a higher probability of success with the 401(k) plan.
Finally, when defining ‘success’ as the replacement of 80% of pre-retirement income, the analysis found the 401(k) plan has a much higher probability of success than the DB plan for all groups except the lowest-income quartile, for which the probability of success is virtually even for the 401(k) and the DB plan.
So, what was Rosenbaum’s conclusion? The 401(k) isn’t perfect. It’s one of the reasons he still has a job (TPAs included), but we shouldn’t blame inanimate objects and we shouldn’t blame 401(k) plans for what people do.