In 1975, U.S. private-sector defined benefit (DB) plans had a total of 27.2 million active participants, and private-sector defined contribution (DC) plans had 11.2 million active participants.
In 2019, the most recent year for which there is data, private-sector DB plans had 12.6 million active participants, and private sector DC plans had 85.5 million active participants.
When you look at the numbers in the form of a graph (shown below), the reversal of fortune is made all the more obvious—and that’s just what the nonpartisan Congressional Research Service recently created to show a visual depiction of the gradual decline in DB participants and steep ascent of DC participants.
While there’s no real news here, it still makes for a striking illustration of the dramatic shift that has occurred in the U.S. retirement system over the past five decades.
The CRS report also found that among all private-sector workers, 68% had access to either a DB or DC plan (or both) in 2021. Among these workers, 15% had access to a DB plan, 65% had access to a DC plan, and some had access to both.
Factors underlying the shift
A main reason companies made the shift from pensions to 401ks, the report states, is that “employer costs are generally higher for DB plans than for DC plans, because the benefit in a DB plan is typically funded entirely by the employer, while a smaller portion of the typical DC plan benefit is from employer contributions.”
From an employer’s perspective, the report notes contributions to DC plans tend to be a more predictable cost than contributions to DB plans are. “This is because employer contributions to DB plans may include additional contributions to make up for investment losses, whereas in DC plans employer contributions are typically based on a set formula that uses employee compensation.”
In addition, the report says DC plans are easier to administer than DB plans are. “DB plan actuaries determine the value of benefits earned by participants in a year and how much the plan must set aside to fund those benefits, incorporating factors such as likely retirement ages and mortality rates. DC plans do not use any of these actuarial projections.”
For some employees, DC plans may be preferable to DB plans because DC plan account balances are portable, the report continues. When individuals change jobs, they can roll over their account balances to IRAs or, often, to their new employers’ plans. “In contrast, DB plan benefits are not portable, and the benefit formula typically takes into account the number of years a worker has worked for an employer. Employees who change jobs would not accumulate the same benefits as they would had they stayed with one employer. On the other hand, DC plans place more decisions and risk for retirement income on the worker.”
As a result of the shift, some have noted that the growth of DC plans since 1974 may have resulted in a greater share of private-sector workers receiving income from retirement plans. The reasons may include (1) lengthy vesting provisions that may have prevented some individuals in DB plans from receiving benefits and (2) the overall lower costs of DC plans, which may have resulted in more employers offering these plans.
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