A recent analysis conducted by Morningstar Retirement indicates that Americans who will not participate in defined contribution (DC) plans, such as 401(k)s, are over twice as likely to encounter financial difficulties in their retirement years. The study presents the Morningstar Model of U.S. Retirement Outcomes, a simulation instrument designed to evaluate the adequacy of retirement income based on personal attributes, healthcare expenses, and anticipated longevity. Findings suggest that particular demographic groups might face heightened risks of retirement inadequacies due to elements including current savings, financial assets, variations in retirement account holdings, and involvement in DC plans.
Almost 60% (57%) of households not engaged in future DC plans may find it challenging to cover anticipated retirement costs, whereas merely 21% of individuals with at least two decades of expected participation experience similar vulnerabilities. Spencer Look, FSA, from the Morningstar Center for Retirement & Policy Studies remarked, “The model clearly illustrates that engaging in an employer-sponsored defined-contribution plan greatly reduces the likelihood of retirement financial shortfalls. Our model not only establishes a new benchmark in retirement research but also offers valuable insights for policymakers and sponsors of retirement plans.”
The likelihood of encountering retirement financial shortfalls differs across age cohorts, with Baby Boomers and Generation X facing greater risks (52% and 47%, respectively) than Millennials (44%) and Generation Z (37%).
Importance of Access to Employer-Sponsored DC Plans
The transition from defined benefit plans to DC structures has given older generations less opportunity to build savings, while younger cohorts benefit from advantages such as automatic enrollment and target-date funds. In summary, the model forecasts that about 45% of American households will experience a shortage of funds during retirement.
Discrepancies are notably more significant among single women (55%), Hispanic Americans (61%), and non-Hispanic Black Americans (59%) when compared to couples (41%), single men (40%), non-Hispanic other Americans (40%), and non-Hispanic white Americans (40%). To address these challenges, the retirement sector should prioritize enhancing access to employer-sponsored plans and boosting participation levels. Plan providers may contemplate implementing strategies such as automatic enrollment, student loan matching initiatives, and emergency savings accounts.
The researchers at Morningstar are confident that these insights will provide a foundational basis for forthcoming reports utilizing the simulation model to assess the effects of assorted legislative initiatives and products on the retirement landscape.
