By: Russ Kamp, Managing Director, Ryan ALM, Inc.
I published a post on August 31, 2022, titled, “Let’s Get Realistic“. I provided a bit of a rant regarding the reporting for DC plan participants looking at an account balance of $1,000,000. I indicated that I thought any analysis done with this balance was unrealistic given that the median account balance for 55-64-year-olds according to Vanguard’s annual report was only a little more than $89,000. When applying the “4%” rule, a target percentage for withdrawals that would “ensure” that the participant didn’t exhaust their account balance in retirement, the annual amount to safely withdraw was a whopping $3,560/year. Oh, my.
Well, the news that I’m about to share doesn’t make this scenario any brighter. First, Vanguard has published additional information suggesting that <15% of their 401(k)/IRA participants have an account balance that is >$250,000. At $250,000 the 4% rule would produce an annual distribution of $10,000. That sum isn’t going to provide anyone with a dignified retirement. To make matters worse, recent research produced by Richard Sias and Scott Cederburg, finance professors at the University of Arizona; Michael O’Doherty, a finance professor at the University of Missouri, and Aizhan Anarkulova, a Ph.D. candidate at the University of Arizona, suggests that the 4% rule is really a 1.9% rule! The study is entitled “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets.”
The implications are extraordinary. Regrettably, they too referenced an account holder with $1,000,000 in retirement assets. Why? Is this chosen threshold to make all of us in the industry feel as if we’ve really helped most people secure a dignified retirement? Let’s play the game. A holder of $1m would see their annual distribution fall from $40,000/year to a meager $19,000. But a more realistic application of the updated 1.9% rule would suggest that the median 55-64-year-old would now get to safely withdraw $1,691/year. Some retirement that will fund!
DC plans have been around for a long time, and many members of the private sector have only had exposure to DC offerings throughout their careers. We can’t use a lack of time in a plan as an excuse anymore. DC plans were intended to be supplemental to DB plans. They aren’t anymore. They are it! This social experiment is failing and those that we are supposed to be serving will suffer the consequences. I don’t know if the right answer for a plan participant is 4%, 1.9%, 6%, etc. I do know that DB plans provide a superior experience for the masses. The failure to maintain DB plans will produce profoundly negative outcomes. I’m not proud of our industry that this is the best we can do! Are you?