NCPA - National Center for Policy Analysis

Defined Contribution Plans Will Force Many to Work Longer

October 7, 2003

When will you retire? It might depend on what type of retirement plan you have.

A typical worker with only a 401(k), known as a defined-contribution plan, retires an average of 15 months later than one with a traditional defined-benefit (DB) pension plan, according a study by the Center for Retirement Research at Boston College.

The reason has to do with the makeup of 401(k)s vs. traditional pensions -- and the retirement incentives that a pension plan offers.

401(k)s may lead to later retirement for three reasons, according to the report:

  • 401(k)s don't have the explicit early-retirement incentives that traditional pensions usually carry; traditional plans often pay more in lifetime benefits to individuals who retire at age 55 or 60 than those who retire at 65 -- a provision originally developed to encourage workers to retire as their productivity declines.
  • Benefits in 401(k)s are typically paid out in a lump sum, rather than a lifelong stream of monthly payments as in traditional pensions; individuals may behave differently when receiving lump sums, tending to spend more slowly to avoid running out of money.
  • Because of investment risk, individuals may consider 401(k) benefits less reliable than traditional pension benefits; this source of uncertainty may make workers more cautious about leaving the labor force.

"One group of people may do really well," says Munnell. "They may retire during a market run-up, and the next group of people may get nailed. That introduces an enormous uncertainty into retirement planning."

Source: Pamela Yip, "As pensions phase out, many will work longer," Dallas Morning News, October 6, 2003; Alicia H. Munnell, Kevin E. Cahill and Natalia A. Jivan, "How Has the Shift to 401(k)s Affected the Retirement Age?" An Issue In Brief No. 13, September 2003, Center for Retirement Research at Boston College.


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