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September 2007, Vol. 130, No. 9
Employer generosity in employer-matched 401(k) plans, 2002–03
Over the last few decades, the growth of defined contribution pension plans and the concomitant decline in defined benefit plans has been the most salient trend in the provision of retirement benefits by employers.1 In particular, one type of defined contribution plan—the 401(k) plan—increasingly has become the primary way employers provide retirement benefits to their workers.2 401(k) plans are characterized by the feature that workers’ contributions, together with any ensuing interest, are afforded the significant advantage of being untaxed until the workers withdraw money from the plan in their retirement. As 401(k) plans continue to grow in popularity, their generosity—the details of how employers contribute money to employee accounts—becomes of greater and greater interest to workers, employers, and policy analysts. This article builds on information provided in National Compensation Survey (NCS) publications to provide more details about 401(k) plan generosity.3
In particular, the article focuses on a type of 401(k) plan referred to in NCS publications as a savings and thrift plan. Such a plan determines employers’ contributions by applying a matching formula to the contributions made by each employee; employees are required to contribute to the plan in order to receive the employer match. This type of plan is by far the most prevalent type of 401(k) plan offered today,4 although a significant number of employers provide 401(k) plans in which they make (nonmatching) contributions, regardless of the employees’ contributions, while other employers offer 401(k) plans as tax-advantaged savings vehicles for employees, but offer no employer contribution. 5 At the same time, virtually all savings and thrift plans are 401(k) plans.6
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1 "Retirement plans are classified as either defined benefit or defined contribution plans. Defined benefit plans determine payments according to a fixed formula based on salary, years of service, and age. Defined contribution plans determine payouts on the amount of money contributed and the rate of return on the money invested" (National Compensation Survey: Employee Benefits in Private Industry in the United States, 2003, Bulletin 2577 (Bureau of Labor Statistics, January 2006), p. 49); on the Internet at www.bls.gov/ncs/ebs/sp/ebbl0021.pdf.
2 See, for example, Stephanie Costo, "Trends in retirement plan coverage over the last decade," Monthly Labor Review, February 2006, pp. 58–64; and William Wiatrowski, "Medical and retirement plan coverage: exploring the decline in recent years," Monthly Labor Review, August 2004, pp. 29–36.
3 The NCS, a survey of employers conducted by the Bureau of Labor Statistics, measures employer costs for wages and benefits, as well as many other characteristics of employer-provided benefits.
4 According to NCS data for 2002–03, 88.2 percent of workers who had access to a 401(k) plan in which the employer offered some contribution had access to a savings and thrift 401(k) plan. In comparison, 15.2 percent had access to a deferred profit-sharing 401(k) plan (in which possibly irregular employer contributions are made so that the employee can share in the employer’s profits), and 4.6 percent had access to a money purchase 401(k) plan (in which employers contribute regularly according to a predetermined formula). Note that these numbers sum to more than 100 percent because some workers have access to more than one type of 401(k) plan.
5 Recent data on the incidence of such "zero-match" plans have been collected by the NCS, which estimates that 16 percent of private-industry workers had access to such benefits in 2005 and 2006. The 16-percent figure seems broadly consistent with those obtained by other sources. For example, Olivia S. Mitchell, Stephen P. Utkus, and Tongxuan Yang, Turning Workers Into Savers? Incentives, Liquidity, and Choice in 401(k) Plan Design, NBER Working Paper 11725, October 2005, report that zero-match plans make up 18 percent of their sample of 2001 Vanguard clients; and Alicia H. Munnell, Annika E. Sundén, and Catherine Taylor, "What Determines 401(k) Participation and Contributions?" Social Security Bulletin, vol. 64, no. 3, 2002, pp. 64–75, report that zero-match plans constitute 12 percent of 401(k) plans in the 1998 Survey of Consumer Finances.
6 In the NCS data for 2003, a very small fraction (less than 0.5 percent) of savings and thrift plans do not allow pretax contributions and, accordingly, are not 401(k) plans.
Related BLS programs
National Compensation Survey - Benefits
Trends in retirement plan coverage over the last decade.—Feb. 2006.
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