401(k) Plans and Women: A "Good News/Bad News" Story

Over the past two decades, coverage under employer-sponsored pension plans has shifted from traditional defined benefit to 401(k)-type defined contribution formats. This shift has many important implications for retirement security. This brief examines the differential impact of the transition for men and women. For women, the shift from defined benefit to 401(k) plans is a “good news/ bad news” story. When women are employed and accruing retirement income benefits, the news is good. 401(k) plans are better for short-tenured workers, and women are more likely than men to have short tenures. Therefore, more women are likely to end up with more benefits and their benefits are likely to be larger when they have a 401(k) plan rather than a traditional defined benefit plan. The bad news arrives when women retire. As women tend to live longer than men, their 401(k) balances must provide an income stream over a longer stretch of time. Should they wish to annuitize a portion of their 401(k) accumulations at retirement, they will find that insurance companies compensate by providing smaller benefits to women, and larger benefits to men. In defined benefit plans, men and women with comparable work histories would get the same monthly benefit. Women who rely on their husband’s earnings and pension benefits are also affected by the shift from defined benefit plans to 401(k)s. Under traditional defined benefit plans, the government requires that the worker receive a joint-and-survivor annuity at retirement, unless the spouse specifically waives the requirement. This provision gives the wife a legal claim on her husband’s pension benefit. No such automatic claim exists with 401(k) plans. At this point, it is unclear whether the good news or bad news will carry the day. But the outcome is extremely important because women have not done well in our retirement income system. Among elderly women without a husband, more than one in four is poor or near poor. Among single women age 85 and over, the figure approaches one in three. To date, elderly women have relied heavily on Social Security, but in the future Social Security will replace a far smaller share of pre-retirement earnings than it does at present. Fortunately, women’s labor force participation, earnings, and participation in employer plans have all increased significantly over the past three decades. Their retirement income security thus will depend increasingly on 401(k) plans, so it matters a lot whether the good news in the accumulation of benefits sufficiently outweighs the bad news in the payout of benefits.