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401(k)-Type Plans

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Redressing Social Security’s funding shortfall by cutting benefits or hiking payroll taxes is likely to make returns on past contributions barely, if at all, positive. Workers with access to defined-contribution (DC) pension plans, however, might improve their retirement income by investing more in stocks than in bonds. Historical experience suggests that over investment horizons of 20 years or longer, stocks in general are likely to yield much higher returns than bonds with only modest (or no) increased risk of capital loss. How much an individual in a DC plan can invest in stocks rather than bonds depends on the number and scope of investment choices the plan offers.

Suggested citation: "401(k)-Type Plans," Federal Reserve Bank of Cleveland, Economic Trends, no. 01-01, pp. 16, 01.01.2001.

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