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U.S. Department of Labor Futurework
Trends and Challenges for Work in the 21st Century
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Portability of Benefits, Job Changes, and the Role of Government Policies

by Robert L. Clark, Professor
College of Management North Carolina State University

Task Force Working Paper #WP12

Prepared for the May 25-26, 1999, conference
"Symposium on Changing Employment Relations and New Institutions of Representation"

September 1, 1999

3. Retirement Plans

Pension Coverage

The proportion of the labor force covered by some type of employer-provided pension rose rapidly from 1950 until 1975 when about half of the labor force was included in an employer pension. Since 1975, the percent of the labor force covered by a pension has remained relatively stable with coverage falling slightly in the early 1980s then increasing slightly. Examination of Current Population Surveys indicates that in 1993, 57 percent of all civilian workers were employed by companies that sponsored a pension plan and 44 percent of all civilian workers were participating in their company plan (EBRI, 1994). Both of these rates were slightly higher than the participation rates found in the 1980s but were very close to the rates in 1979.

Surveys of individuals and employers yield some general observations concerning participation in company-provided retirement plans. Men are slightly more likely to participate in a pension than women; however, theproportion of women participating in a pension has been increasing while the participation rate of men has been decreasing. Public employees are much more likely to be working for an employer that offers a pension than are private employees and public employees were also more likely to participate in the pension when one was offered. Participation is also higher among private sector workers who meet employment conditions specified by the Employee Retirement Income Security Act of 1974 which include the worker being at least 21 years of age with one or more years of tenure on their current job and working 1,000 or more hours per year.

Participation rates in employer-provided pension plans increase with job tenure, age, and annual earnings. These relationships suggest that as workers age and acquire more tenure, attain better jobs, and have higher earnings, the likelihood that they will be included in an employer pension plan increased. Union members are much more likely to participate in a pension plan than nonunion workers. Big companies are much more likely to offer pension plans than small companies and part-time workers are less likely to be participating in company retirement plans than are full-time workers.

Examining the Employee Benefit Surveys of medium and large firms, small firms (fewer than 100 workers), and state and local governments (see Table 1) illustrates the relatively stability in overall pension coverage during the 1990s. Approximately 80 percent of full-time employees of firms with more than 100 workers were covered by a pension throughout the 1990s compared to only about 45 percent of employees in smaller firms and 95 percent of state and local government workers. There was no clear trend during the 1990s in the pension coverage rates for any of these workers.

Table 1

Percentage of Full-time Employees Participating in Retirement Plans

Year

Any Pension

Defined Benefit

Defined Contribution

Medium and Large Private Establishments

1988

80

63

45

1989

81

63

48

1991

78

59

48

1993

78

56

49

1995

80

52

55

1997

79

50

57

Small Private Establishments

1990

42

20

31

45

22

33

1994

42

15

34

1996

46

15

38

State and Local Governments

1990

96

90

9

1992

93

87

9

1994

96

91

9

Source: Various years of U.S. Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, Employee Benefits in Small Private Industry Establishments, and Employee Benefits in State and Local Governments.

Defined Benefit and Defined Contribution Pension Plans

Historically, defined benefit plans were the primary type of retirement plan offered by employers. In the past two decades, there has been a dramatic shift toward greater utilization of defined contribution plans and less reliance on defined benefit plans (see Table 2). Defined contribution plans increased as a proportion of all pension plans from 67 percent in 1975 to 92 percent in 1997. The proportion of active pension participants with primary coverage in a defined contribution plan increased from only 13 percent in 1975 to 42 percent in 1997 (Olsen and VanDerhei, 1997). Further examination of the BLS employee benefit surveys supports these trends. The proportion of full-time workers among employees in medium and large firms covered by a defined benefit plan declined from 63 percent in 1989 to 50 percent in 1997. The decline in coverage by defined benefit plans for employees in small firms was from 20 percent in 1990 to 15 percent in 1996 while coverage among state and local government employees remained stable at approximately 90 percent (see Table 1). In contrast, coverage by defined contribution plans increased from 48 to 57 percent in medium and large plans and from 31 to 38 percent for employees of small firms. These data clearly reveal the dramatic decline in the use of defined benefit plans and the corresponding increase in the coverage by defined contribution plans.

Table 2

Text Only

Private Pension Plans and Participants

Comparison

1975

1980

1985

1990

1993

1997

Defined contribution plans as percent of all pension plans

67

70

73

84

88

92

Participants in defined contribution plans as percent of all pension participants

26

34

47

50

52

53

Active participants in primary defined contribution plans as percent of all active participants

13

16

30

38

42

42

Source: Olsen and VanDerhei (1997).

The decline in utilization of defined benefit plans has resulted from increased government regulation that has raised the administrative cost of offering defined benefit plans in comparison to defined contribution plans and the introduction of new types of defined contribution plans such as the 401(k) plans (Clark and McDermed, 1990). The increase in relative cost of providing defined benefit plans has fallen most heavily on small firms (Hustead, 1998) and as a result, the decline in the use of defined benefit plans has been greatest among these firms.

Structural changes in the economy such as increased employment in the service sector and in smaller firms along with changes in the composition of the labor force to include more mobile workers have also increased the demand for greater use of defined contribution plans (Gustman and Steinmeier, 1992; Ippolito, 1997). Papke (1999) reports evidence of the direct substitution of defined contribution plans for defined benefit plans as firms terminate defined benefit plans and establish defined contribution plans. The replacement of defined benefit plans that lack portability with defined contribution plans that are completely portable is an important trend as the U.S. economy moves towards a more mobile labor force in the twenty-first century.

401(k) Retirement Plans

The most rapidly growing type of pension plan is the 401(k) plan. These plans allow workers to make pre-tax contributions to a retirement savings account. Worker contributions are voluntary and most plan sponsors provide some type of employer matching contribution. In 1983, only 7 percent of private wage and salary workers were offered a 401(k) plan but this proportion increased to 25 percent in 1988 and further to 35 percent in 1993 (U.S. Department of Labor, 1994a). In 1993, approximately two thirds of all persons offered such a plan chose to participate. Offer and participation rates are much greater for full-time workers. These rates increase with age up to the mid-40s and increase with annual earnings.

In most 401(k) plans, workers must decide whether to make voluntary contributions to the plan and how much to contribute. If the worker makes a contribution, many companies then provide some employer matching of the employee contribution. Having contributed to the 401(k) plan, the employee then must decide how to invest the funds. Typically, plan sponsors provide a variety of investment options including fixed income securities and equities. Income in retirement will depend on when the employee begins to contribute, how much the employee contributes, and the performance of the investments chosen. Research studies show that participation and contribution rates increase with age, job tenure, and earnings. Contributions also depend on plan provisions such as the company match rate (Papke, 1995), education and communication concerning the plan (Clark and Schieber, 1998), and access to the funds prior to retirement through loan provisions (U.S. General Accounting Office, 1997a).

A recent analysis of eighty seven 401(k) plans in 1995 yielded several important observations concerning worker choices in these retirement plans (Clark, Goodfellow, Schieber, and Warwick, 1998). The proportion of eligible workers who contributed to these plans during 1995 increased with age rising from about two thirds of workers in their 20s to over 80 percent of employees over age 40. Participation rates also increased with annual earnings rising from about 70 percent of workers earning less than $25,000 to over 90 percent of eligible employees with annual earnings in excess of $60,000. Employee contributions averaged approximately 7 percent of annual earnings.

Adjusting for age and annual earnings, women were more likely to have made a contribution to the 401(k) plan and in general, contributed a higher percent of their salary to the pension plan. The proportion of pension funds invested in equities decreased with age and increased with annual earnings. Women were not more conservative investors with their retirement monies in plans that did not have company stock as an investment option. In plans with an option for investment in company stock, men tended to invest a larger proportion of their retirement funds in their own employer’s stock.

Implications of Changes in Pension Coverage

Only about half the labor force is currently covered by any type of employer pension and this proportion has remained at this level for the past 20 years. While this underestimates the proportion of all workers who will ultimately receive a pension in retirement, the current coverage rate and the stability of this rate over the past two decades indicate that many workers will not receive a company pension in retirement. The stability of the coverage rate suggests that this will not change in the near future.

Coverage data clearly show that persons not accumulating pension credits are low wage workers and persons who work fewer hours per year and fewer years of job tenure during their lifetime. If women continue to have shorter, more irregular working careers, they will continue to accumulate less in defined contribution pension plans than comparable male workers.

The trend toward increased availability of defined contribution plans has several potential implications for future retirement income. Workers who change jobs frequently accumulate lower retirement benefits when they move among firms with defined benefit plans. In contrast, job changes have relatively little impact on eventual retirement benefits of those in defined contribution plans. This implies that in the future, mobile workers may enter retirement with larger total pension benefits than in the past. The greater portability of the defined contribution plans, especially 401(k) plans, should make job changes easier and less costly in the future.

However, defined contribution plans place greater responsibility and investment risk on the individual worker. Most employees of firms providing defined benefit plans are automatically covered by the plan and they do not have to choose to reduce current income in order to save for retirement. In contrast, participants in many defined contribution plans and especially 401(k) plans must decide how much to contribute to the plan each pay period. Low wage workers are less likely to be employed by firms that offer 401(k) plans and when offered, they are less likely to choose to participate in the plan. If they wait until middle age to participate or if they contribute too little, they will have relatively low retirement benefits.

Participants in defined contribution plans must also decide how to invest their retirement funds. Selecting investments with low rates of returns will also lead to lower retirement benefits. Participants in these plans also may have access to the retirement funds prior to their retirement through loans or lump sum distributions at the time of job changes. If participants remove monies from their accounts, they will have lower benefits in retirement.

In summary, available evidence indicates that the proportion of workers who will receive pension benefits in retirement will remain about the same as today unless there are fundamental changes in the national retirement and tax policies. For future retirees who have earned an employer pension, an increasing proportion of them will receive income from defined contribution pension plans, especially 401(k) plans. At present, the impact on pension income of participation in defined contribution rather than defined benefit plans is not known; however, the greater portability of defined contribution plans should enhance the mobility of the work force in the twenty-first century.

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