Market Risk and Retirement Plans

Abstract

At retirement, the goal of most workers is to be able to pay their anticipated living expenses using their employer-sponsored retirement plan, savings, and Social Security. Today, most workers’ employer-sponsored retirement plans are defined contribution, or 401k, plans, yet some workers are still enrolled in defined benefit plans, otherwise known as pensions. In this issue of PERCspectives on Policy, Dennis Jansen and Andrew Rettenmaier discuss how both types of plans are subject to market risk by simulating the investment outcomes for each plan under similar constraints. The authors illustrate that the pension plan delivers a defined benefit to its participants that exceeds the benefit produced by a defined contribution plan in 60% the simulated outcomes, but the pension plan itself falls short in 46% of the outcomes and also has the distinct disadvantage of non-portability.