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How do retirement plans for private industry and state and local government workers compare?

By David Zook

The National Compensation Survey (NCS) produces two annual publications that provide a rich amount of information on retirement plans.¹ How retirement plans differ between private industry workers and state and local government workers is a major point of interest. What type of plans are offered to workers? Are plan characteristics different or basically the same?

Retirement plans are typically divided into two types: defined contribution plans and defined benefit plans.² Defined contribution plans specify employer contributions and place them into an individual employee account. The most prevalent defined contribution plan type are savings and thrift.³ Defined benefit plans provide employees with guaranteed retirement benefits based on a benefit formula. A participant's retirement age, length of service, and preretirement earnings may affect the benefits received. Plans that result in pensions are defined benefit plans.

In this Beyond the Numbers article, readers will get an overview of the availability and features of retirement plans and how they compare between private industry and state and local government workers. The focus will primarily be on savings and thrift plans and traditional defined benefit plans.⁴

Differences in access, participation, and take-up rates

Chart 1 shows how plans for the private industry and state and local government workers differ regarding access, participation, and take-up of defined benefit and defined contribution plans. As of March 2022, 69 percent of private industry workers had access to retirement benefits (either defined benefit or defined contribution plans), while 92 percent of state and local government workers had access. Of those who had access, 52 percent of private industry workers participated, while 82 percent of state and local government workers participated. The take-up rate, or the percentage of workers with access to a plan who participated in the plan, was 75 percent for private industry workers and 90 percent for state and local government workers.

In March 2022, defined benefit plans are more prevalent for state and local government workers. Only 15 percent of private industry workers had access to a defined benefit plan, compared with 86 percent of state and local government workers.

Conversely, defined contribution plans were more prevalent for private industry workers, as 66 percent of private industry workers had access to a defined contribution plan. Of those workers, 48 percent participated, resulting in a take-up rate of 73 percent. Thirty-nine percent of state and local government workers had access to a defined contribution plan and 19 percent participated, resulting in a take-up rate of 49 percent.

For workers with access to retirement plans, 12 percent of private industry workers and 34 percent of state and local government workers had access to both defined benefit and defined contribution plans. However, 3 percent of private industry workers only had access to defined benefit plans, while 53 percent of state and local government workers only had access to a defined benefit plan. On the other hand, 54 percent of private industry workers only had access to defined contribution plans, while 5 percent of state and local government workers only had access to defined contribution plans.

Defined contribution plans

Within data collected by NCS, defined contribution plans are categorized into eight plan types: deferred profit sharing, employee stock ownership plan (ESOP), money purchase pension, savings and thrift, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE), and other.⁵

A defining characteristic of defined contribution plans is that employees are typically required to contribute to the plan to receive a contribution from their employer. Additionally, the contributions for many defined contribution plans are pre-tax, meaning they are deducted from earnings before any taxes are taken out.

Chart 3 shows that in 2019 most private industry workers participated in savings and thrift plans (79 percent), followed by deferred profit-sharing plans (15 percent), money purchase pension plans (16 percent), and ESOPs (4 percent). In 2016, most state and local government, participated in money purchase pension plans (72 percent), followed by savings and thrift plans (37 percent).

Seventy-one percent of private industry workers and 69 percent of state and local government workers were required to contribute to receive an employer contribution. (See chart 4.) For both private industry and state and local government workers, contributions are pre-tax for 83 percent of private industry workers and 87percent of state and local government workers were pre-tax.

Focusing on savings and thrift plans, estimates show that 100 percent of private industry and state and local government workers participated in plans allowing pre-tax contributions. However, post-tax contributions were available to 54 percent of private industry workers, compared with 34 percent for state and local government workers. (See chart 5.)

A feature of savings and thrift plans is automatic enrollment, whereby employees must opt-out or employee contributions are taken from their paycheck to help employees save for retirement. Forty percent of private industry workers participating in savings and thrift plans had an automatic enrollment feature, compared with 28 percent of state and local government workers. (See chart 5.) The median automatic enrollment default amount was 3 percent for both private industry and state and local government workers.

Table 1. Automatic enrollment for default contribution as percent of earnings for saving and thrift plans, 2019 and 2016

Industry (All workers participating in savings and thrift plans = 100 percent)	10th percentile	25th percentile	50th percentile	75th percentile	90th percentile
Private workers (2019)	2	3	3	5	6
State and local government workers (2016)	2	3	3	5	5
Note: For data on private companies, see table 35 at https://www.bls.gov/ncs/ebs/detailedprovisions/2019/ownership/private/retirement-plan-provisions-private-2019.pdf; and for government data, see table 31 at https://www.bls.gov/ncs/ebs/detailedprovisions/2016/ownership/govt/table31a.pdf. Source: U.S. Bureau of Labor Statistics.

In 2019, 94 percent of private industry workers could choose how to invest their personal contributions and 94 percent could choose how to invest their employer’s contribution. In 2016, 83 percent of state and local government workers could choose how to invest their personal contributions and 83 percent could choose how to invest their employer’s contribution.

Methods of distributing retirement benefits for savings and thrift plans

NCS produces data on four available savings and thrift plan benefit distribution methods for earnings to employees upon retirement.⁶ Some employees had the option to receive their retirement savings in a combination of the methods of disbursement. However, employees can choose the disbursement method typically must choose only one method from the following:

• Lump-sum option where the retiree can receive all the assets in his or her savings and thrift plan that include both employee and employer contributions, plus interest and earnings, at one time. Among savings and thrift plan participants, 92 percent of private industry workers and 85 percent of state and local government workers had lump sum distribution available.
• Installment plans provide retirees regular payments from their savings and thrift plan until all savings have been depleted. If funds are still available after the death of the recipient, the remaining installment payments go to designated beneficiaries. Thirty-six percent of private industry workers and 60 percent of state and local government workers had installments distribution available.
• Annuity plans provide retirees the benefit as a stream of guaranteed periodic payments over their lifetime. Fourteen percent of private industry workers and 41 percent of state and local government workers had an annuity distribution available, in 2019 and 2016, respectively.
• Other plans can provide a combination of installments and annuity. Seven percent of private industry workers had other distribution methods available. NCS did not find any state and local government workers with other distribution methods available in 2016. However, for 8 percent of private industry workers the NCS program was unable to determine the method of retirement benefit distribution.

Defined benefit plans

The availability and participation of defined benefit plans for private industry workers vary from state and local government workers. Fifteen percent of private industry workers had access to defined benefit plans and 11 percent of those with access participated in plans—resulting in a take-up rate of 74 percent. Defined benefit plans for state and local government workers had an access rate of 86 percent, of which 75 percent of workers participated, resulting in a take-up rate of 87 percent.

NCS categorizes defined benefit plans into two categories: traditional plans and nontraditional plans. Traditional defined benefit plans provide a stipulated dollar amount at retirement or through a specified formula that includes factors, such as career earnings, age, and years of service, to provide a known dollar amount benefit. Nontraditional defined benefit plans are plan types that include cash balance plans and pension equity plans.

Differences existed in the type of defined benefits plans available to private industry workers versus state and local government workers. As shown in the chart 8, 58 percent of private industry workers participate in traditional defined benefit plans in 2019, compared with 98 percent of state and local government workers who participated in traditional defined plans in 2016.

The 42 percent of private industry workers and the 2 percent of state and local government workers who participated in nontraditional plans participated in cash balance plans. In 2019, 38 percent of private industry workers; in 2016, 2 percent of state and local government workers participated in cash balance plans.⁷

Traditional plan formula: percent of terminal earnings

NCS publishes provisions of traditional defined benefit plans with a formula based on the percent of terminal earnings. This allows comparisons between plan features available to private industry and state and local government workers. The following examples are only a subset of the information available, readers are encouraged to explore the estimates at www.bls.gov/ebs.

Traditional plan formulas are generally based on either a flat rate per year of service or vary on different factors, such as years of service or earnings. In 2019, traditional plan formulas were based on a flat percent for 48 percent private industry workers, compared with 75 percent of state and local government workers in 2016. A variable formula was available for 52 percent of private industry workers in 2019, compared with 20 percent of state and local government workers in 2016. (See table 2.)

Table 2. Defined benefit plans for traditional plan formula in private and state and local government, 2016 and 2019

Industry (All workers participating in traditional defined benefit plans with a terminal earnings formula = 100 percent)	Flat percent per year of service	Percent per year varies	Other
Private workers (2019)	48	52	-
State and local government workers (2016)	75	20	5
Note: Dashes indicate that no data were reported or that data do not meet publication criteria. For data on private companies, see table 13 at https://www.bls.gov/ncs/ebs/detailedprovisions/2019/ownership/private/retirement-plan-provisions-private-2019.pdf; and for government data, see table 12 at https://www.bls.gov/ncs/ebs/detailedprovisions/2016/ownership/govt/table12a.pdf. Source: U.S. Bureau of Labor Statistics.

Chart 9 shows how the flat percent per year of service differs depending on sector. At the 10th percentile, private industry workers have a flat percent amount of 1.0 percent in 2019, compared with state and local government workers’ rate of 1.5 percent in 2016. The median flat percent amount was 1.4 for private industry workers and 2.0 for state and local government workers. At the 90th percentile, private industry workers have a flat percent amount of 2.0 percent, compared with 2.5 percent for state and local government workers.⁸

Traditional plan formula: age matters

At what age do employees generally get to retire and how does the age differ between sectors? ⁹ Table 3 shows that for normal retirement, the median retirement age is 65 for private industry workers in 2019 and 60 for state and local government workers in 2016.

Table 3. Selected normal retirement age requirements for traditional defined benefit plans in private and state and local government workers, 2019 and 2016

Industry (includes all workers in traditional defined benefit plans with an age requirement)	10th percentile	25th percentile	50th percentile (median)	75th percentile	90th percentile
Private workers (2019)	60	62	65	65	65
State and local government workers (2016)	55	55	60	63	65
Note: For data on private companies, see table 11 at https://www.bls.gov/ncs/ebs/detailedprovisions/2019/ownership/private/retirement-plan-provisions-private-2019.pdf; and for government data, see table 10 at https://www.bls.gov/ncs/ebs/detailedprovisions/2016/ownership/govt/ebbl0060.pdf. Source: U.S. Bureau of Labor Statistics.

Early retirement is a feature that allows employees to retire before normal retirement, typically with a reduction in benefits. According to NCS data, 99 percent of private industry workers and 92 percent of state and local government workers have the option of early retirement. Table 4 shows the median age of early retirement is 55 for both private industry and state and local government workers, in 2019 and 2016, respectively.

Table 4. Availability of early retirement with selected requirements for traditional defined benefit plans in private and state and local government workers. 2019 and 2016

Industry (includes all workers in traditional defined benefit plans with an age requirement)	10th percentile	25th percentile	50th percentile (median)	75th percentile	90th percentile
Private workers (2019)	-	55	55	55	55
State and local government workers (2016)	50	50	55	55	60
Note: Dashes indicate that no data were reported or that data do not meet publication criteria. For data on private companies, see table 15 at https://www.bls.gov/ncs/ebs/detailedprovisions/2019/ownership/private/retirement-plan-provisions-private-2019.pdf; and for government data, see table 17 at https://www.bls.gov/ncs/ebs/detailedprovisions/2016/ownership/govt/table17a.pdf. Source: U.S. Bureau of Labor Statistics.

Defined benefit plans: soft-freeze and frozen plans and alternatives

Soft-freeze retirement plans are those that no longer allow new employees to participate but allow all or some workers already in the plan to continue accruing benefits. In 2022, 59 percent of private industry workers and 47 percent of state and local government workers were in defined benefit retirement plans that were open to new participants. During the same year, 23 percent of private industry and approximately 53 percent of state and local government workers participated in soft-frozen plans. Of the 27 percent of private industry workers participating in soft-frozen plans, 23 percent were in plans where all participants continued to accrue benefits. The remaining 4 percent of workers were in plans where some participants are continued accruing benefits.

Frozen plans are benefit plans that are typically closed to new enrollees and limit future benefit accruals for some or all active plan participants. Some may no longer allow participants to accrue additional benefits. In 2022, 15 percent of private industry workers and less than 0.5 percent of state and local government workers were in frozen, or hard-freeze plans. as of the day the plan was frozen. (See chart 10.)

In 2022, 6 percent of private industry workers did not have plan alternatives to frozen defined benefit plans, while all (100 percent) state and local government workers had access to retirement plan alternatives.¹⁰

• To provide alternatives for workers who were no longer able to participate in frozen defined benefit plans
• 11 percent of private industry workers and 93 percent of state and local government workers were allowed to participate in a modified existing defined benefit plan;
• 17 percent of private industry workers and 5 percent of state and local government workers could participate in a new defined benefit plan;
• 43 percent of private industry workers and 1 percent of state and local government workers could participate in an enhanced defined contribution plan that already existed;
• and 33 percent of private industry workers and 16 percent of state and local government workers could participate in a new defined contribution plan. (See chart 11.)

Conclusion

NCS produces a variety of estimates that allow users to gain a deep understanding of the types and characteristics of retirement plans available to American workers. Estimates can be used to understand what types of plans are offered and how workers in varying sectors, occupations, and industries choose to participate in available plans. Additionally, the estimates can shed light on specific provisions of the plans, such as employer contributions to savings and thrift plans or early retirement service requirements, to better understand how private industry and state and local government retirement plans compare.

This Beyond the Numbers article was prepared by David Zook, supervisory economist, in the Office of Compensation and Working Conditions, U.S. Bureau of Labor Statistics. E-mail: zook.david@bls.gov; telephone: (202) 691-6224. 

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