A new study by Morningstar Retirement reveals that Americans without future participation in defined contribution (DC) plans, such as 401(k)s, are more than twice as likely to face financial shortfalls in retirement. The research introduces the Morningstar Model of U.S. Retirement Outcomes, a simulation tool that assesses retirement income sufficiency based on individual characteristics, healthcare costs, and projected longevity. The report suggests that certain demographics may be at greater risk of retirement shortfalls due to factors like current retirement savings, financial resources, disparities in retirement account balances, and DC plan participation.
Nearly 6 in 10 (57%) households that do not participate in a future DC plan may struggle to sustain projected retirement expenses, while only 21% of those with at least 20 years of future participation face similar risks. Spencer Look, FSA, from the Morningstar Center for Retirement & Policy Studies, stated, “The model paints a clear picture: Participating in an employer-sponsored defined-contribution plan significantly lowers the risk of retirement shortfalls. Our model not only sets a new standard in retirement research but also provides actionable insights for policymakers and plan sponsors.”
The risk of experiencing retirement shortfalls varies across generations, with Baby Boomers and Gen X at higher risk (52% and 47%, respectively) compared to Millennials (44%) and Gen Z (37%).
Need for employer-sponsored DC plan access
The shift from defined benefit to DC plans has left older generations with less time to accumulate savings, while younger generations benefit from features like automatic enrollment and target-date funds. Overall, the model predicts that approximately 45% of American households will run short of money in retirement.
Disparities are more pronounced among single females (55%), Hispanic Americans (61%), and non-Hispanic Black Americans (59%), compared to couples (41%), single males (40%), non-Hispanic other Americans (40%), and non-Hispanic white Americans (40%). To mitigate these risks, the retirement industry should focus on providing more Americans with access to employer-sponsored plans and increasing participation rates. Plan sponsors might consider features like auto-enrollment, student loan match programs, and emergency savings accounts.
The Morningstar researchers believe these findings will serve as a foundation for future reports using the simulation model to evaluate the impacts of various legislative proposals and products on the retirement system.
