Sex and 401(k) Plans

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Over the past two decades, private pension coverage has shifted from defined benefit plans to 401(k) plans. This shift has many important implications for the retirement security of older Americans. One so–far–overlooked consequence is that it has changed the relative price of annuities for men and women. Annuities are financial instruments that guarantee retirees a lifetime stream of income in exchange for an initial premium payment. The reason for the change in the price is that annuities provided under the two types of plans are regulated by different legal regimes.

Federal labor law covers annuities provided through defined benefit pension plans, and labor law requires equal pay for equal work. The Courts have interpreted this requirement to mean that a man and a woman with equal earnings histories should receive equal monthly pension benefits. Since women and men have different average life expectancies, they will receive different lifetime benefits.

In contrast, 401(k) plans do not generally offer annuities; they provide lump–sum payments at retirement.1 Retirees who want to annuitize the lump sums must take the money to an insurance company, which will sell them a single premium individual annuity (SPIA). Insurance companies, which are regulated by state insurance law, will provide smaller benefits to women and larger benefits to men than would defined benefit plans. Since women live longer than men do on average, men and women as groups will receive equal lifetime benefits.