As Congress sets its sights on tax reform, the Congressional Research Service (CRS) has prepared a new report that focuses on worker participation in employer-sponsored retirement plans. The report provides data on the percentage of U.S. workers who have access to and participate in employer-sponsored pension plans. It is certain to pique Congress’ interest, as it scrutinizes the effectiveness of tax-advantaged savings plans as part of overall tax reform.
The CRS report, prepared for members of Congress, is conducted by the Bureau of Labor Statistics and uses data from the National Compensation Survey (NCS), which looks at employer costs for employee compensation and the availability of employee benefits among U.S. workers. The report looks at access to and participation in both defined benefit and defined contribution plans.
In recent decades, defined contribution plans have become the dominant employer-sponsored retirement plan in the private sector. The CRS report highlights how this shift from defined benefit plans to defined contribution plans affects worker participation in employer-sponsored pension plans.
In a defined benefit plan, plan participants receive monthly payments during retirement that are based on a formula that typically uses a combination of length of service, contribution rate, and final years’ salary. In a defined contribution plan—such as a 401(k) or 403(b) plan—plan participants contribute a percentage of their salary to an individual account—often with an employer matching contribution—and receive payments during retirement based on the value of their individual account. Unlike a defined benefit plan, in a defined contribution plan, the onus is on the plan participant to contribute to her plan and to direct the plan investments from the options offered by the plan sponsor.
The CRS report found that—while not all workers have access to an employer-sponsored pension plan—the percentage of workers who participate in a plan to which they have access differs between defined benefit and defined contribution plans. Among workers who have access to a defined benefit plan, 85 percent participate in the plan. Among workers with access to a defined contribution plan, only 69 percent participate in the plan.
There are a number of reasons for lower participation rates among workers with defined contribution plans. Unless the plan has an automatic enrollment feature—workers are automatically enrolled in the plan at a default contribution rate unless they opt out—many workers simply fail to enroll in the plan. And because defined contribution plans are generally funded by contributions from workers, some workers may be unwilling to forgo current income to fund their future retirement. Unfortunately, this means that those workers also forgo any employer matching contributions to the plan, effectively leaving “free money” on the table.
A number of other factors also affect participation, including access to an employer-sponsored pension plan. Access to an employer-sponsored pension plan is usually greater for full-time workers, state and local public-sector workers, workers in higher paying occupations, and those employed by larger firms. The CRS report found that these factors significantly affect participation. Key report findings include the following.
- Participation in employer-sponsored pension plans is greater for full-time workers than part-time workers. Among private-sector workers, 65 percent of full-time workers participate in a pension plan compared to 22 percent of part-time workers. And among state and local public-sector workers, 89 percent of full-time workers participate in a pension plan compared to 34 percent of part-time workers.
- Participation in employer-sponsored pension plans is greater for state and local public-sector workers than for private-sector workers. For state and local pubic-sector workers, 81 percent of workers participate in the plan, whereas only 54 percent of private-sector workers participate. And unlike private-sector workers, most state and local public-sector workers are more likely to participate in a defined benefit plan rather than a defined contribution plan.
- Participation in employer-sponsored pension plans is greater for workers in higher paying occupations. Among private-sector workers, 76 percent of workers in occupations with the highest 25 percent of average wages participate in the plan, compared to 22 percent of private-sector workers in occupations with the lowest 25 percent of average wages.
- Participation in employer-sponsored pension plans is greater for workers employed by larger firms. For example, 76 percent of private-sector workers employed by firms with 500 or more employees participate in the plan, whereas only 33 percent of private-sector workers employed by firms with fewer than 50 employees participate in the plan.
This lower participation rate is significant from a public policy standpoint, as the number of Fortune 500 companies sponsoring an open conventional defined benefit plan fell from 50 percent in 1998 to 5 percent in 2015, according to an analysis by Willis Towers Watson. And because part-time workers, lower-paid workers, and workers employed by smaller firms are less likely to have access to an employer-sponsored retirement plan, the public policy implications of their lower participation is likely to be scrutinized by Congress as they assess the overall effectiveness of current tax-advantaged savings policies as part of comprehensive tax reform.
Congress has held hearings and proposed approaches to increase retirement savings in the past, but no major federal legislation has been enacted since 2006. Even if Congress does not act now, states are increasingly looking at ways to cover workers who may not have access to an employer-sponsored retirement plan. Five states have enacted legislation to provide a state-based automatic IRA program for workers not covered by an employer-sponsored retirement plan. And legislation has been introduced in more than two dozen other states to set up or study options for state-based retirement savings programs for workers not covered by employer-sponsored retirement plans.