Paul Yakoboski, TIAA-CREF Institute
March 2005 |
The growth of defined contribution (DC) retirement plans, such as 401(k) plans in the private sector and 403(b) and 457 plans in the non-profit and public sectors, has changed the landscape of retirement income security for American workers. The fraction of families with 401(k)-type account has increased from 32 percent in 1992 to 67 percent in 2001. In 1992, 38 percent of families with a pension plan participant had only a DC plan; by 2001, that portion had grown to 58 percent. The fraction with both a defined benefit and a defined contribution remained unchanged over this time period at 23 percent.
The increased importance of DC arrangements means increased decision-making responsibilities for working Americans. Much attention has focused on decisions during the accumulation phase: participation, contribution levels, asset allocation and asset preservation at job change. Some have argued that defined contribution plans are doomed to failure because the majority of workers are ill equipped to make these decisions wisely.
Research, however, published in the American Economic Review, finds that pension benefits are higher with 401(k) plans than defined benefit plans, with the typical worker receiving an extra 38 percent of retirement income from 401(k) plans. The authors conclude, “that the trend toward 401(k) plans has strengthened the retirement security of current workers.”
This article synthesizes previous research to examine the attitudes of workers and retirees regarding the receipt of income from their retirement plans, the reasons behind low annuitization rates, annuitization options available to workers, the value of annuitization, and satisfaction levels among those who have annuitized assets.