Document Type
Working Paper
Date of this Version
1-1-2009
Abstract
Despite only having been in existence for 27 years – less than a typical working career – some analysts seem to have concluded that 401(k) plans are a failure. For example, some argue that the 401(k) is “coming up short” due to, among other factors, low contribution rates among those participating. A recent government report concludes that “low defined contribution plan savings may pose challenges to retirement security.” In addition, there are proposals to replace 401(k) plans with Guaranteed Retirement Accounts, in part due to belief that 401(k) plan participants will not be adequately prepared for retirement. This paper illustrates that moderate 401(k) contribution rates can lead to adequate income replacement rates in retirement for many workers; that adequate asset accumulation can be achieved using only a 401(k) plan; and that these results do not rely on earning an investment premium on risky assets. Using Monte Carlo simulation techniques, this study also illustrates the investment risk faced by participants who choose to invest their 401(k) contributions in risky assets, or who choose to make systematic withdrawals from an investment account in retirement rather than annuitize their account balance.
Working Paper Number
WP2009-01
Copyright/Permission Statement
Opinions and errors are solely those of the author and not of the institutions with whom the author is affiliated. © 2009 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Acknowledgements
The views presented in this article reflect the conclusions of the author and do not necessarily reflect the views of the Investment Company Institute or its members. I would like to thank Curtis Carlson for providing assistance in programming the stochastic simulations used in this paper, Michael Bogdan and Stephen Sigrist for research assistance, Sean Collins, Sarah Holden, Brian Reed, and John Sabelhaus for helpful comments, as well as participants at the National Tax Association 2006 Annual Meetings, the March 2007 Tax Economist Forum, and the August 2007 Federal Interagency Forum on Aging-Related Statistics’ Workshop on Estimating Pension Wealth. Any errors are the responsibility of the author.
Date Posted: 23 August 2019