Retirement costs for defined benefit plans higher than for defined contribution plans
Beginning in the 1980s, a dramatic shift occurred in employer-sponsored retirement plans. This shift was away from traditional defined benefit plans and towards portable defined contribution plans, such as the popular 401(k). Reasons for this shift were due, in part, to costs and flexibility for both employers and employees. Employer contributions required for defined benefit pension plans can fluctuate based on plan investment returns. By comparison, employer costs for defined contribution plans are often based on a fixed formula that matches employee contributions.1 According to the Bureau of Labor Statistics (BLS) March 2012 Employer Costs for Employee Compensation (ECEC), private industry employers now spend more per employee hour worked for defined contribution plans than for defined benefit plans.2 However, a slightly different picture can be revealed when ECEC data are averaged by plan participants only (those employees that use or are enrolled in a plan).
This issue of Beyond the Numbers focuses on private industry employer retirement plan costs, estimating costs for defined benefit and defined contribution retirement plans by plan participant. Retirement based plan participant costs are reviewed by major occupational group, bargaining status, and establishment size.
Estimates of benefit provisions in this issue are from the BLS publication, National Compensation Survey: Employee Benefits in the United States, March 2012, available online at www.bls.gov/ncs/ebs/benefits/2012. Employer cost estimates for retirement plans are from Employer Costs for Employee Compensation (ECEC), March 2012, available online at www.bls.gov/news.release/archives/ecec_06072012.pdf. Worker participation costs are based on published estimates, in which costs are rounded to the nearest cent and participation is rounded to the nearest percent. Worker participation costs are derived for individual benefits only and should not be combined to form broader benefit categories, because estimates are based on different sets of participants for each benefit. Statistical comparison statements involving estimates of worker participation costs cannot be validated due to unavailable standard error estimates.
Retirement plan worker participation costs
Published ECEC benefit costs represent an average employer cost per employee hour worked, based on all workers (including those employers that do not offer a benefit or have zero cost for providing a benefit), not the average cost per employee plan participant, which can be substantially different by benefit due to large fluctuations in participation rates. Employer defined benefit or defined contribution per participant costs can be derived by dividing the ECEC benefit cost per hour by the benefit plan participation rate for that particular benefit. The result, referred to as worker participation costs, provide average employer costs only for those employees who are plan participants.
Table 1 shows March 2012 ECEC private industry employer costs for defined contribution plans are higher (60 cents) than the cost for defined benefit plans (43 cents). During the same period, more than twice as many private industry workers participated in a defined contribution plan (41 percent) compared with defined benefit retirement plans (17 percent). If worker participation costs are derived (taking the ECEC cost divided by the participation rate for the benefit for that time period), data shows that private industry employer costs for defined benefit participants are more expensive than for defined contribution participants. In March 2012, private industry worker participation costs were more than 70 percent higher for defined benefit than for the defined contribution benefit.
|Characteristics||Employer costs per employee hour worked||Participation (in percent)||Worker participation cost(1)|
|Defined benefit||Defined contribution||Defined benefit||Defined contribution||Defined benefit||Defined contribution|
Management, professional, and related
Sales and office
Natural resources, construction, and maintenance
Production, transportation, and material moving
1 to 99 workers
100 to 499 workers
500 workers or more
NOTE: Bolded numbers indicate the higher estimates per category for defined benefit versus defined contribution.
Higher private industry defined benefit worker participation costs follow similar trends for other worker and establishment characteristics, such as by major occupational group, bargaining status, and establishment size. (See the exhibit for more information on determining ECEC and worker participation costs.)
Worker participation costs by major occupational group
Private industry employer worker participation costs for natural resource, construction, and maintenance employees show higher defined benefit costs than other major occupational categories. Management, professional, and related occupations were highest for defined contribution worker participation costs. Service workers showed the lowest worker participation costs for both defined benefit ($1.50 per employee hour worked) and defined contribution (81 cents) benefits. (See table 1.)
Worker participation costs by bargaining status
March 2012 ECEC data indicates that the employer cost of defined benefit for union workers is approximately 7 times higher than the cost for nonunion workers. This cost differential is caused, in part, by significantly higher participation rates for union workers. In March 2012, union participation rates for defined benefit plans were over 5 times higher than nonunion participation rates. Using worker participation costs, defined benefit costs for union workers were approximately 40 percent higher than nonunion workers. The difference in worker participation costs between union and nonunion workers for defined contribution benefits were more than 20 percent. (See table 1.)
Worker participation costs by establishment size
Employers with 500 or more workers have ECEC defined benefit costs that are approximately four times higher than the ECEC defined benefit cost for employers that have 1 to 99 employees. However, the defined benefit participation rate for the larger establishments was roughly 6 times higher (42 percent) than for smaller employers (7 percent). When worker participation costs are determined, smaller establishments show higher costs for defined benefit compared with larger establishments. Worker participation costs for defined contribution benefits were considerably higher for larger establishments, approximately 30 percent over smaller establishments. (See table 1.)
This Beyond the Numbers was prepared by the Bureau of Labor Statistics, National Compensation Survey staff, Office of Compensation Levels and Trends, in Washington, DC. Email: NCSInfo@bls.gov. For more benefits information, see www.bls.gov/ebs. For additional assistance, contact one of our information offices: National-Washington, DC: (202) 691-6199, TDD (800) 877-8339; Atlanta (404) 893-4222; Boston: (617) 565-2327; Chicago: (312) 353-1880; Dallas: (972) 850-4800; Kansas City: (816) 285-7000; New York: (646) 264-3600; Philadelphia: (215) 597-3282; San Francisco: (415) 625-2270.
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“Retirement costs for defined benefit plans higher than for defined contribution plans,” Beyond the Numbers: Pay & Benefits, vol. 1, no. 21 (U.S. Bureau of Labor Statistics, December 2012), https://www.bls.gov/opub/btn/volume-1/retirement-costs-for-defined-benefit-plans-higher-than-for-defined-contribution-plans.htm
Defined benefit plan. A defined benefit retirement plan provides employees with guaranteed retirement benefits that are based on a benefit formula. A participant’s retirement age, length of service, and preretirement earnings may affect the benefit received.
Defined contribution plan. A defined contribution retirement plan specifies the level of employer contributions and places those contributions into individual employee accounts. Retirement benefits are based on the level of funds in the account at the time of retirement.
Participation. Participation is the percent of employees who actually enroll in a benefit plan. A plan may be a contributory plan that requires employees to contribute to the plan’s cost in order to participate, or it may be a noncontributory plan for which the employer pays 100 percent of the cost of the benefit.
Worker participation cost. Derived cost that equals the ECEC benefit cost for an individual benefit divided by the participation rate for that benefit.
Publish Date: Wednesday, December 12, 2012