DC plans crucial against retirement income shortfalls, says Morningstar report

While workers face a significant risk of not living out the retirement they imagined, with some segments more vulnerable than others, being part of a defined contribution plan can go a long way in cutting down that threat.

That’s according to research from the Morningstar Center for Retirement & Policy Studies, which draws upon a newly launched simulation tool aimed at evaluating retirement income sufficiency in the US.

Using various factors including individual characteristics, healthcare costs, and projected longevity, the Morningstar Model of US Retirement Outcomes revealed a broad-based risk of American workers falling short of their retirement goals.

“The model paints a clear picture: Participating in an employer-sponsored defined-contribution plan significantly lowers the risk of retirement shortfalls,” stated Spencer Look, lead author of the report and associate director of retirement studies at the think tank.

The report, titled “Beyond the Retirement Crisis Headlines: Why Employer-Sponsored Plans Are the Key to Retirement Adequacy for Today's Workers,” highlights key findings that underscore the vital role of defined-contribution plans.

For one, it found 57 percent of workers who do not participate in DC plans may not sustain projected retirement expenses, compared with 21 percent of those with at least 20 years of participation.

Approximately 45 percent of American households are predicted to run short of money in retirement, with single females facing a higher risk (55 percent) compared to couples (41 percent) and single males (40 percent).

The research also cast fresh light on socioeconomic disparities. The model projects some 61 percent of Hispanic Americans and 59 percent of non-Hispanic Black Americans would face retirement shortfalls, compared with roughly 40 percent for both non-Hispanic other Americans and non-Hispanic white Americans.

Based on the Morningstar Center for Retirement & Policy Studies’ simulations, people’s retirement age can change the equation drastically. Nearly 54 percent of households could experience shortfalls if they retire at 62, versus 45 percent at 65, 38 percent at 67, and 28 percent at 70.

Interestingly, it found baby boomers and Gen Xers are at higher risk (52 percent and 47 percent, respectively) compared to millennials (44 percent) and Gen Zers (37 percent), mainly due to the shift from defined-benefit pensions to defined-contribution plans.

To mitigate these risks, the report suggests that the retirement industry should enhance access to employer-sponsored plans and improve participation rates.

From a policy design perspective, it suggested plan sponsors might consider adding features such as auto-enrollment, student loan matches, and emergency savings accounts to boost engagement and ensure more Americans achieve financial security in retirement.