'The Rise of Worker Capitalism' by Richard Nadler

<< < > >>

Figure 1

Defined Contribution Plans vs. Defined Benefit Plans

70%

Defined Contribution Plans

60%

Defined Benefit Plans

50%

40%

30%

20%

10%

1985

1993

1999

Yeer r

Ya a

SourcSo:uEe: Emolyyee BennetfRtesearseansthutInsnitutve,standt InveanmInstituC.ompany Institute.

e rcmpl p oee B e efi i Re ch I rcit e, atd In e men Compsty ent te

assets--roughly $1.5 trillion. Named for the

nomenon is real. But the degree of job transi-

section of the Internal Revenue Code that

tion leakage that actually occurs in DC

defines them, 401(k)s allow employees to

accounts is large when the account is small

accept a portion of their wages as "deferred

and the worker is young, small when he is

contributions," usable for investment but

mature and his accumulation considerable.

not for current consumption.

Samwick and Skinner have found that a typ-

In 1998, a worker in a qualified plan

ical worker may change jobs five times, with

could contribute as much as $10,000 per

most of the changes concentrated early in his

year into a personal retirement account. He

career. Samwick and Skinner found that "the

could allocate his contribution among the

probability of reinvesting lump-sum distrib-

Given more free-

investment options provided in his plan--

utions . . . rises steadily with age, and is 48

dom to choose,

typically stock or bond mutual funds. His

percent for those age 35 to 44, 57 percent for

workers saved

income taxes on the contributions were

those age 45 to 54, and 73 percent for those

deferred until the funds were withdrawn. If

age 55 to 64."

more for their

he liquidated his investments prior to

Even after incorporating job-change

retirement rather

retirement, he would generally pay a 10 per-

leakage into their model, Skinner and

than less.

cent penalty in addition to taxes due.

Samwick calculated that worker benefits

Compared with IRAs, 401(k)s offered

under DC plans are 135.5 percent greater

employees higher contribution limits and

on average, and 50.3 percent greater at the

(generally) an employer match. When the Tax

median, than worker benefits under DB

Reform Act of 1986 forced many workers to

plans. Given more freedom to choose, workers

choose between them, 401(k)s replaced IRAs

saved more for their retirement rather than less.

as the most popular tax-deferred savings

401(k) Plans

vehicle for workers.

Assets in 401(k)s increased from $92 bil-

One type of plan held 68 percent of DC