Employer Commitment to Retirement Plans in the United States

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The last decade has been a tumultuous one for employers. Against a backdrop of market bubbles and crashes, two recessions and rising health care expenses, companies have made changes to their retirement programs to mitigate risk and manage costs. Some have shifted risk to their workers by transitioning from defined benefit (DB) to defined contribution (DC) plans. Many have reduced the retirement benefits they provide.

With fewer employers offering DB plans, more employees are relying on DC plans as their primary source of retirement income. Although employers have made enhancements to their DC plans in recent years, companies that offer only a DC plan provide a lower level of retirement benefits, as measured by percentage of pay, than those that sponsor a DB plan. And even those companies that have maintained their DB plans have reduced the value of their retirement benefits, albeit from higher levels. If corporate America’s commitment to workers’ retirement plans continues to decline at the pace it has over the past decade, we could see retirement straits in the future that negatively affect employers and employees alike.

Key Findings

• Total retirement benefits, including DB, DC, retiree medical and retiree life insurance plans, provided to employees decreased from 7.8% of pay in 2002 to 6.9% of pay in 2008. 
• In the same time period, companies that provided only a DC plan saw a small increase in overall benefit value, from 5.3% to 5.6% of pay. The value climbed because employers enhanced matching and/or nonmatching contributions for their DC plans.
• For companies that shifted from DB to DC-only coverage between 2002 and 2008, commitment to retirement fell substantially, from 8.7% of pay in 2002 to 5.5% of pay in 2008. Although these companies increased their DC benefit values by an average of 2.7 percentage points, this gain covered only approximately half of the DB value lost by closing or freezing their pension plans. 
• For companies that have maintained DB plans throughout this period, the value of their overall retirement benefits declined from 9.4% to 8.6% of pay, mostly due to a significant cut in postretirement health benefits.