How Does the Probability of a ‘Successful’ Retirement Differ Between Participants in Final-Average Defined Benefit Plans and Voluntary Enrollment 401(k) Plans?

Source: Jack VanDerhei, Employee Benefit Research Institute (EBRI), EBRI Notes, Vol. 36, No. 10, October 2015

From the abstract:
This paper begins with a review of the previous academic literature and summarizes previous Employee Benefit Research Institute (EBRI) research analyzing the conditions under which voluntary-enrollment (VE) 401(k) plans are likely to provide an accumulation of retirement assets at least equivalent to those provided under a counterfactual final-average defined benefit (DB) plan. New research is then presented to show the percentage of “successful” retirements by income quartile for workers currently ages 25-29 who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. Results are first presented for both voluntary-enrollment 401(k) plans and final-average DB plans with a 1.5 percent accrual rate. Sensitivity analysis is provided by also analyzing the comparative success rates of final-average DB plans with accrual rates of 1.0 and 2.0 percent. Using baseline assumptions (defined in the study), it appears that the DB plan has a higher probability of achieving a real replacement rate (when combined with Social Security payments) of 60 percent than the VE 401(k) plans for the first three income quartiles. If a 70 percent replacement rate is used as a threshold, participants in the third- and fourth-income quartiles have a much higher probability of success with the 401(k) plans than the DB plans. When the threshold is set at a higher (and according to many financial planners, more realistic) replacement rate of 80 percent, the 401(k) plans have a much higher probability of success than the counterfactual DB plans for all groups except for the lowest-income quartile (where the results are virtually even).