If there was any doubt about the move from DB (defined benefit) to DC (defined contribution) plans like 401(k)s, the 2016 Global Pension Assets Study by Willis Towers Watson put that to rest reporting that almost 40% of world-wide retirement funds are held within DC plans. Additionally, the growth rate of DC plans was double that of their DB counterpart.
With almost 60% of retirement assets in DC plans, the US is a world leader topped only by Australia at 86.6% which is itself a bit deceiving because it includes the equivalent of our Social Security system. Laggards with way less than 10% in DC plans included Japan, Canada and the Netherlands who face a real retirement crisis as more workers retire living longer are funded by government and corporate pension plans putting a greater burden on tax payers and current workers.
If IRA assets are included in the DC plan total, then they account for almost 75% of US retirement plans not including state and local pension funds. IRAs, like DC plans, are investor directed with the vast majority coming from DC rollovers. And, DC plans rose 17.9% compared to 11% for DB plans in 2013 which was the second time in 15 years that DC plans outperformed DB plans and by the largest margin in 24 years.
With over 25 states moving toward mandating that smaller companies offer a retirement plan, the over 4 million companies and 50% of the workforce not covered will only add to the DC and IRA assets, which is a healthy sign for the US. And if you have any doubts about why companies are moving away from DB plans, you only have to look at the recent news that GM will have to contribute $3 billion to their pension plans. State and local plans face even greater issues: though there are an estimated $5 trillion is those plans, some experts estimate that there is $4 trillion in unfunded liability. In fact, Stanford’s PensionTracker estimates that California’s unfunded state and local pension liability would amount to $75,000 per household.
So while the US retirement system is relatively healthy, helping workers to replace sufficient income in retirement through DC plans and IRAs is still a challenge which companies are realizing could be a problem if older workers cannot retire when their hearts, hands and minds are not fully engaged.
