How Much Would It Take? Achieving Retirement Income Equivalency Between Final-Average-Pay Defined Benefit Plan Accruals and Automatic Enrollment 401(k) Plans in the Private Sector

Abstract

Previous EBRI research reported on a comparative analysis of future benefits from private-sector, voluntary enrollment (VE) 401(k) plans and stylized, final-average-pay defined benefit (DB) plans. This paper expands upon work previously published by computing for a number of simulated employee contingencies (such as job turnover) what level of final-average DB accrual would provide an equal amount of retirement income at age 65 as would be produced if the projected sum of voluntary enrollment 401(k) and IRA rollover balances were annuitized. In so doing, it provides a comparison in median outcomes for a variety of assumptions, both market returns and annuity purchase prices, and should provide a much-needed reference point for policy makers in evaluating these plan designs in view of both current and future workforce trends. Rather than trying to reflect the real-world variation in DB accruals, the baseline analysis used the median accrual rate in the sample (1.5 percent of final compensation per year of participation) as the stylized value for the baseline counterfactual simulations. EBRI’s modeling finds that the median accrual rates (mid-point, half above and half below) that final average DB pensions would need in order to provide retirement income equal to voluntary enrollment 401(k) plans would range from just under 1 percent to 3 percent of final compensation per year of participation, using baseline assumptions. These rates would go down if investment returns fall and annuity prices go up, to between 0.6-1.6 percent per year. The PDF for the above title, published in the December 2013 issue of EBRI Notes, also contains the fulltext of another December 2013 EBRI Notes article abstracted on SSRN: “Views on Employment-Based Health Benefits: Findings from the 2013 Health and Voluntary Workplace Benefits Survey.”