Peter J. Brady
WP2009-01
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.