A common story line is that yesteryear’s retirees lived large, with lifelong pensions from defined benefit plans. Today’s seniors, reduced to 401(k)s and other mainly self-funded defined contribution plans, may find themselves clipping coupons and buying in bulk to survive.
That’s not exactly how the Investment Company Institute sees things.
In a recent report on “The Success of the U.S. Retirement Market,” the ICI contends that “the extent to which previous generations of retired households relied on income generated by private sector DB plans is often exaggerated.”
Consequently, the move from a defined benefit world to a defined contribution world “is unlikely to reduce retirement preparedness.”
Participation in defined benefit plans has never been universal, according to the ICI. In 1989, there were 27 million active participants in such plans. By 2010, that number had dropped to 17 million active participants.
However, as the report indicates, 41% of near-retiree households had accrued defined benefit plan assets that year, including accruals in both private-sector and government plans, compared with 55% of near-retiree households in 1989. Defined benefit plans “will continue to be an important source of retirement resources in the near future,” the ICI concluded.
Meanwhile, the number of participants in 401(k) plans has increased from 17 million in 1989 to 51 million in 2010. Many public-sector employees also may participate in 403(k) or 457 plans. All told, assets in these defined contribution plans totaled $4.7 trillion in the middle of this year.
While private-sector employees are much more dependent on defined contribution plans, the ICI reported a bright side.
“Since 1975,” the report states, “the prevalence of income generated by private sector retirement plans of all types (measured by both the share of retirees with the income and the amount of income) has increased substantially. In fact, because they are better suited to the mobile U.S. workforce, several studies conclude that the shift from DB plans to DC plans in the private sector will increase retirement resources for most households.”
Donald Jay Korn writes for Financial Planning, a SourceMedia publication.
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