On June 8, 2022, the Congressional Research Service published “Private-Sector Defined Contribution Pension Plans: An Introduction.” We reviewed the report and wanted to highlight a few key data points. Defined contribution plans include 401(k), 403(b), and profit-sharing plans. The report does not include government employer plans.
Congress continues to introduce bills related to retirement security (see our Blog Post on Secure Act 2.0 and the Employee and Retiree Access to Justice Act). These new bills continue to focus on increasing access to part-time workers, easing the implementation of retirement plans for smaller employers, and encouraging plans to implement automatic enrollment features. Based on the results in this Congressional Research Service report, we can expect continued emphasis on those features. If you’d like to discuss design changes to your defined contribution plan, please contact a Faegre Drinker benefits attorney for assistance.
Defined Contribution Plans are the Main Retirement Plan
The report examines private-sector defined contribution plans, as those are the most likely plans offered to and participated in by private-sector workers. Based on a March 2021 Department of Labor Survey:
- 53% of private-sector workers had access to a defined contribution plan;
- 12% of private-sector workers had access to a defined benefit pension plan and defined contribution plan; and
- 3% of private-sector workers only had access to a defined benefit pension plan. Defined benefit pension plans were once the only kind of retirement plan; they have now clearly been surpassed by defined contribution plan designs.
Full-Time Workers Have More Access to Defined Contribution Plans
Full-time workers were significantly more likely to have access to a defined contribution plan:
- 74% of full-time workers had access to a defined contribution plan; and
- 38% of part-time workers had access to a defined contribution plan.
Higher Wage Earners Are More Likely to Have a Defined Contribution Plan
As the wages of a worker increased, so did the likelihood that they had access to a defined contribution plan. Only 42% of the lowest quartile of wage earners had access to a defined contribution plan, while 64% of the second-to-lowest quartile (the 25% to 50%) had access. Approximately 85% of workers in the highest wage quartile had access to a defined contribution plan.
The Larger the Employer, the Higher the Likelihood of a Defined Contribution Plan
For employers with fewer than 50 employees, only 51% offered a defined contribution plan. In contrast, for employers with 100 or more employees, 76% offered a defined contribution plan.
Automatic Enrollment Boosts Participation
Not surprisingly, defined contribution plans that automatically enroll participants had participation rates of about 90%, compared to only 70% in plans without automatic enrollment. The Pension Protection Act of 2006 made automatic enrollment easier for plans and paved the way for more plans to adopt the design.
The Rise Of Target Date Funds
Automatic enrollment and automatic investment are connected, and the Pension Protection Act of 2006 added the qualified default investment arrangement, including target date funds (a fund that invests in assets based on the age of the individual, becoming more conservative over time as the individual nears retirement). In 2006, approximately 19% of participants invested in a target date fund. As of 2018, that number had increased to 56%, which is attributable to increases in automatic enrollment designs and the addition of target date funds.