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September 18, 2002
Traditional Pensions Losing Ground
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The report notes that while workers are increasingly likely to be covered by some sort of retirement savings plan, a declining share is covered by the older-style plans that pay a guaranteed monthly retirement benefit.
Employers are increasingly offering DB plans that distribute "lump-sum" distributions on job termination, primary and supplemental defined contribution (DC) plans, and a variety of hybrid arrangements. But traditional DB pensions remain an important part of both the private-sector retirement system - especially in large companies and in plans covered by collective bargaining agreements - and the public-sector retirement system.
The September EBRI Issue Brief, which covers the 1975-2001 period, with most data extending only to 1998, explains these trends in terms of the types of firms that are affected by the increased use of defined contribution plans, the number of participants involved, fund resources, and the implications for retirement income security. It also highlights legislative and regulatory efforts to amend the current employment-based system, and analyzes these efforts in terms of their potential impact on DC versus DB plans.
Some of the report's key findings:
* Between 1975, when the Employee Retirement Income Security Act (ERISA) became effective, and 1998, the latest year for which comprehensive data are available, the number of private-sector tax-qualified retirement plans more than doubled, from 311,000 to 730,000. The number of participants in these plans - including active workers, separated vested survivors, and retirees - rose from 45 million to 99 million. Active participants increased from 31 million to 52 million.
* An increasing number of employers are offering primary and supplemental DC plans as well as an array of hybrid plans, with the result that the share of qualified DC plans, participants, and contributions has grown substantially, relative to DB plans. Like the growth in number of private-sector plans through 1998, the growth in DC participants has been concentrated primarily among smaller private firms, with DB plans tending to be more prevalent among public and large private-sector employers.
* The number of DB plans decreased between 1975 and 1998, while the number of total participants remained fairly constant and assets grew. The number of private DB plans increased from 103,000 (33 million participants) in 1975 to 175,000 (40 million participants) by 1983, and then decreased to 56,000 plans (42 million participants) by 1998. Data from the Pension Benefit Guaranty Corporation on DB plans only, indicates a decline to 36,000 DB plans in 2001.
* Relative financial positions of DB and DC plans are shifting. Assets in DB plans grew from $186 billion in 1975 to more than $1.9 trillion in 1998. At the same time, assets in DC plan rose from $74 billion to nearly $2.1 trillion - an increase in the relative share for DC assets from 28 percent (1975) to 52 percent (1998) of all assets in qualified plans.
* Suggested explanations why DB plans are steadily losing ground as the preferred plan type include: government regulation; changes in the workplace, such as increased employee and employer appreciation and demand for DC plans; the business environment and the risk associated with funding and managing pension plans; firm size; the increase in global competition faced by employers in recent years, which has increased the need for more flexibility in plan design; and the successful marketing efforts of consultants and DC plan service providers.
* Both the public and private sectors are moving away from sponsoring plans that pay benefits to older workers only at or near retirement (traditional DB accrual-annuity-based), and increasingly are tending to pay at termination of employment (lump-sum distributions), irrespective of age. This trend will affect the retirement security of future generations, as workers - rather than plan sponsors - become responsible for making their assets last throughout retirement. More recent developments in federal tax law (such as the 2001 EGTRRA tax-cut legislation) and corporate matters (bankruptcies, issuance of company stock in 401(k) plans, financial disclosures, etc.) will also play a role in changing the composition and levels of future retirement income.
"Like many other elements of our economy, retirement plans are changing," said EBRI President and CEO Dallas Salisbury. This report updates the October 1997 EBRI Issue Brief, which also examined trends in employment-based DB and DC retirement plans.
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