Being eligible to participate in a defined contribution (DC) pension plan at work is a key factor in whether American employees will have enough money to afford basic expenses and cover uninsured medical care in retirement, according to a new study.
“A crucial factor in workers’ ability to achieve future retirement income adequacy is their eligibility to participate in a defined contribution plan,” said Jack VanDerhei, research director at the Employee Benefit Research Institute (EBRI) and author of the report.
The “at-risk” level declines the longer workers are eligible to participate in a work-based defined contribution (DC) retirement plan, found the EBRI study Retirement Income Adequacy: Alternative Thresholds and the Importance of Future Eligibility in Defined Contribution Retirement Plans.
For example, looking at a generation X household (those born between 1965 and 1974) in the next-to-lowest income quartile, eligibility in a DC plan has a strong impact on retirement income adequacy. Fifty-eight per cent of households eligible for defined contribution plan participation during less than one-quarter of future work years would be at risk at least 50 per cent of the time, compared with only 21 per cent for those eligible at least three-quarters of future work years, found the study.
“The results, especially for low-income households, are due in large part to the importance of automatic enrollment and automatic escalation of contributions for 401(k) plans in future years,” said VanDerhei.
Retirement income adequacy in the future depends on a number of key factors, including the assumed retirement age, participation rates, employee contribution rates, employer matching formula, employer non-elective contributions, asset allocation, job turnover, cash-out rates and rates of return, found the study.
© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.