DC Beats DB – For the Most Part
Which provides a better retirement income outcome, defined benefit or defined contribution? A new analysis provides results that might surprise some.
The answer, of course, is dependent on assumptions – assumptions that determine the benefits accrued, as well as the threshold of success – how much you have versus how much you will need.
The most recent analysis, by the nonpartisan Employee Benefit Research Institute (EBRI), employed certain specific assumptions about benefit crediting rates of a defined benefit design, as well as interest rates and service credits. Focusing on employees who are eligible for participation in a retirement plan for at least 30 years, EBRI found that a final-average defined benefit (DB) plan with an accrual rate of 1.5% is more likely to provide “successful” outcomes for lower-income workers when the employer-provided retirement benefits are added to the expected Social Security benefits. That said, the difference is that while the DB structure provides a successful outcome for 99%, the DC structure – and mind you, the analysis focused on voluntary, not automatic, enrollment plans – means success for the vast majority (86%) as well.