Shift to DC Has Not Led to Less Retirement Savings

The accumulation of retirement assets has not declined as a result of the shift from defined benefit (DB) to defined contribution (DC) plans, according to an analysis from the Center for Retirement Research at Boston College. 

Researchers compared data from the National Income and Product Accounts (NIPAs) about DB plan accrued benefits and DC plan contributions and found, for the period from 1984 to 2012, DB plan accruals declined sharply, and DC plan contributions rose commensurately as the use of 401(k) plans grew. On balance, the decline in DB plan accruals has not been fully offset by rising contributions to DC plans, leading to a slight overall decline in retirement saving.        

However, the researchers note, retirement plan wealth also goes up by the return on accumulations. They determined the share of DC assets and DB accumulated accruals attributable to current workers, assumed a 5.5% rate of return for both types of plans and applied that rate to accrued liabilities in DB plans and to reported assets in DC plans. 

The results show that, when returns on accumulations are added to contributions, the annual change in retirement plan wealth appears to have been relatively steady over time. “Individuals covered by 401(k) plans have taken more risks than participants in defined benefit plans, and the high returns associated with risky investments have produced substantial asset accumulation,” the researchers write in their brief.

What has changed is that individuals, rather than plan sponsors, now bear all of the risk. So, the researchers concede that, while the aggregate data suggest that accumulations have not declined, the pattern of outcomes among individuals may have changed substantially.