ERISA at 50: BLS tracks the evolution of retirement benefits

The 20th century was the dawn and expansion of retirement security for American workers, with the introduction of private pension plans, the enactment of Social Security, court rulings allowing collective bargaining of employee benefits, and the enactment of several federal laws governing pension plans. The passage of the Employee Retirement Income Security Act (ERISA) in 1974 was among one of the most impactful events; ERISA established guardrails for employer-provided retirement benefits. Fifty years later, the retirement landscape looks very different, with new types of plans and a shift toward greater worker responsibility for their own retirement security. Paralleling this shift over the last half century, the Bureau of Labor Statistics (BLS) tracked changes in retirement benefits and costs. In this article, I look at how the retirement landscape has changed since ERISA, how BLS has tracked those changes, and where the system stands today.

Defined benefit and defined contribution are the two main categories of retirement plans, although in each case there are variations in plan structure and terminology. In general, a defined benefit plan guarantees an employer-provided retirement benefit that an employee will receive for life, typically based on earnings and years of service. In a defined contribution plan, employees have an individual retirement account that may be funded by both employee and employer contributions. Also, in a defined contribution plan, benefits are not guaranteed and can fluctuate because of investment returns. As I will discuss, the prevalence and features of these plans have changed over the past 50 years, as has the information provided by BLS.

Pre-ERISA

BLS gathered information on employee benefits periodically throughout the first half of the 20th century, including special studies and questions added to wage surveys.¹ Starting in the late 1950s, BLS added studies of employer costs for benefits (more on costs below) and a digest that detailed the provisions of retirement plans from specific companies. A 1974 study of a representative sample of defined benefit plans covering 100 workers or more provided a benchmark of the landscape just prior to ERISA.² While many of the plans studied included provisions that met the ERISA standards, some plans had more stringent requirements. Here are a few examples:

• Some plans required employees to work 2 years or more or reach 25 years of age or older prior to participating in the plan.
• Some plans lacked any vesting requirements; this means that if workers left the employer before retirement age, regardless of years of service, they received no benefits.
• Some plans required workers to reach 40 years of age or older and/or work 15 years or more before they were vested in their benefits.
• Some plans did not include benefits for a surviving spouse.
• Some plans required employees to work to age 65 and have at least 15 years of service to be eligible for “normal retirement” benefits (based on the plan formula with no reduction).
• Some plans did not have an “early retirement” option (reduced benefits to account for receipt over a long period) or allowed employees to retire early only with the employer’s consent.³

ERISA

While ERISA does not require private employers to provide retirement benefits, the law imposes requirements when such plans are provided. Although ERISA provisions affect both defined benefit and defined contribution plans, much of the initial focus was on defined benefit plans, which were the predominant type of retirement plan in 1974. Included among the provisions of ERISA are reporting and disclosure requirements (providing information on plan operations to participants and the Department of Labor), funding and fiduciary standards (ensuring that defined benefit plans have sufficient assets that are invested in the best interest of participants), and an insurance program to protect defined benefit plan participants (through the Pension Benefit Guaranty Corporation).⁴ ERISA also required that defined benefit plans meet certain standards to obtain favorable tax status. Here are some examples of ERISA provisions:

• ERISA originally required that plan participation be available to those who reach age 25 with 1 year of service. This was subsequently amended to age 21 with 1 year of service.
• ERISA originally required that participants become fully vested after 10 years (known as cliff vesting), or partially vested after 5 years, increasing until full vesting is achieved after 15 years (known as graded vesting). This was amended to cliff vesting after 5 years and graded vesting from 3 to 7 years.
• ERISA originally required that plan participants could retire with full benefits (“normal retirement”) at the later of age 65, 10 years of service, or full vesting. This was amended to reduce the service requirement to 5 years, which is consistent with the change in vesting requirements.
• ERISA required that a joint-and-survivor annuity be provided to an employee who retires at normal retirement age unless such an annuity is waived. In a joint-and-survivor annuity, the employee’s benefit is reduced to account for payment over the life of both the employee and spouse. Upon the death of the employee, the surviving spouse would typically receive 50 percent of the employee’s benefit, although higher percentages were allowed (with corresponding reductions to the employee’s benefit). This provision was subsequently expanded to provide preretirement death benefits for all vested employees and to require that the joint-and-survivor annuity be the default option for married employees, with any alternative requiring consent from the spouse.

BLS collects information about these retirement provisions, which are discussed in detail below.

BLS benefits data

While not related to the passage of ERISA, in the late 1970s, BLS introduced a program to report on the incidence and detailed provisions of employee benefits; this included retirement plans. First, data on private sector benefits were collected in conjunction with information on wages by occupation for use by the Office of Personnel Management in making comparisons between federal and nonfederal compensation. Ultimately, only wage comparisons were used in federal pay calculations, which are currently governed by the Federal Employees Pay Comparability Act of 1990.⁵ While not used for compensation comparison purposes, BLS continues to capture and report on the details of employee benefits.

Initial BLS benefit surveys focused on full-time workers in large private sector establishments. Beginning in 1979, BLS published annual estimates of the incidence and the provisions of employee benefits, including retirement plans. Among medium and large private firms in 1979, 87 percent of full-time workers participated in a retirement plan––typically a defined benefit plan. As reported by BLS in “Employee benefits in industry: a pilot survey” and subsequent reports, a typical private sector defined benefit plan in the late 1970s and early 1980s, consistent with ERISA provisions, included the following features:

• Employees could participate who had achieved at least 1 year of service and often reached a minimum age; this included a large share of plans that did not allow participation prior to age 25. In addition, some plans imposed a “maximum” participation age that excluded from the plan newly hired workers who were within 5 years of the plan’s normal retirement age. Such maximum age provisions were subsequently outlawed by amendments to ERISA.
• Cliff vesting occurred after 10 years; this means that no benefits were available if an employee left prior to 10 years of service. Once reaching the 10-year milestone, employees had a right to future benefits, even if they left the employer. In some cases, service prior to age 22 was not counted in determining vested service.
• Benefits were based on years of service. Although benefit formulas varied, a typical white-collar benefit was a percent of salary, such as 1.5 percent times final salary times years of service, and a typical blue-collar benefit was a fixed-dollar amount, such as $10-per month times years of service.
• Normal (full) retirement was at age 65, once vested, or at an earlier age (such as age 55) with greater years of service (often 20 years or more).
• Early (reduced) retirement was at age 55 with at least 10 to 15 years of service.
• Benefits were available to surviving spouses. This was typically with the option for the spouse to receive 50 percent or more of the retiree’s benefit and a corresponding reduction to the employee’s benefit to account for the survivor protection.⁶

BLS continued to track retirement benefits throughout the 1980s, first focusing on large private employers and then adding small private employers and state and local governments. Small employers were less likely to provide defined benefit plans than their larger counterparts, while state and local governments frequently provided such benefits. Chart 1 shows the share of employees, in state and local government and private industry, participating in retirement plans in 1989 and 1990.⁷

The information on small private employers and state and local governments revealed differences in benefit amounts and other provisions for different groups of workers. For example, nearly all defined benefit plans for state and local government workers computed benefits as a percentage of earnings times years of service, while some private sector plans used dollars-times-years formulas. Typical state and local government plans provided 2 percent or more for each year of service. In contrast, private sector plans (regardless of employer size) provided about 1.5 percent for each year of service. In some cases, state and local government workers were not covered by Social Security, which may account for some of the differences in benefit provisions.⁸

In the 1990s, BLS expanded its benefit studies to provide greater detail. Information became available by industry, with greater occupational detail, and for several new groupings, including workers who are covered by a collective bargaining agreement, full-time workers or part-time workers, wage level, and broad geographic areas. The expanded dataset identified differences in the availability of defined benefit plans for different groups of workers, as well as the relationship between groups. For example, the higher share of workers participating in retirement plans in certain industries or locations may be related to a higher concentration of union workers. (See chart 2.)

ERISA did not ignore defined contribution plans, but such plans may have received less attention in the 1970s because these plans were not as prevalent as defined benefit plans. Nevertheless, ERISA did impose participation and vesting requirements, which were similar to the requirements for defined benefit plans. But it was another law, the Revenue Act of 1978, that helped promote the use of defined contribution plans in the 1980s and beyond with the addition of section 401(k) to the tax code. This new feature allowed workers to defer paying tax on earnings saved in an employer’s plan. BLS tracked the shift from defined benefit to defined contribution plans throughout the latter part of the 20th century, which is evident when comparing results among full-time employees in private establishments with 100 workers or more. (See chart 3.)

While defined contribution plans can take many forms, the most prevalent plans were categorized by BLS as savings and thrift plans, which generally required employee contributions that were matched by the employer. As initially captured by BLS in the late 1980s through the 1990s, savings and thrift plans had the following typical features:

• Employees were required to work one year before becoming a plan participant; some plans also required employees to be at least age 21.
• Employees could contribute up to 10, 12, 15, or 16 percent of their salary (subject to a maximum dollar amount specified by the Internal Revenue Service).
• Employee contributions were frequently pretax, but some plans offered the option for posttax contributions. Over time, posttax contributions became less prevalent, until the introduction of Roth contributions.⁹
• Employers matched employee contributions. A typical plan had the employer match 50 percent of the first 6 percent contributed by the employee, but there were many other variations.
• Employees frequently chose how their own contributions were invested, with choices including company stock and a variety of other investments.
• Employees were less often able to choose how employer matching funds were invested, with such funds often invested in company stock. Over time, more plans allowed employees to choose how employer matching funds were invested, and investment in company stock became less prevalent.
• Employees were allowed to make preretirement withdrawals for “hardship” reasons, including purchase or repair of a primary residence, education of an immediate family member, a family death or illness, or a sudden uninsured loss. Nonhardship withdrawals were less common. Some plans also allowed employees to take a loan from their plan, which had to be repaid into the plan. In some cases, loans were only allowed for hardship reasons.
• Employees were always vested in their own contributions. Plans used a variety of vesting provisions for employer matching funds, including 3- or 5-year cliff vesting, 5- or 7-year graded vesting, “class year” vesting (vesting of each year’s contributions after 2 or 3 years), or immediate vesting of all employer funds. Over time, class year vesting became less prevalent.
• Distribution of accounts was typically in a lump sum or installments over a fixed period; lifetime annuity payments were less common.¹⁰

BLS benefits data: changes and challenges

As employers continued to alter their retirement plans, BLS continued to identify what new information to capture and how best to report on current plan arrangements. For example, the rise of defined contribution plans meant that employees often had to make a positive decision to join the plan, as opposed to automatic participation in a defined benefit plan (once meeting age or service requirements). To gain a clearer picture of whether employees chose to join the plan, BLS provided new information that identified the share of workers who were offered defined contribution plans and those who participated in a plan. Such information helped to illuminate variations in the “take-up rate,” which is the share of employees who chose to participate when offered a plan. These data also helped to track whether changes in plan features, such as automatic enrollment, influenced take-up rates. Chart 4 illustrates that an increasing share of workers were offered a defined contribution plan throughout the 2000s. Participation rates remained relatively stable for many years but have shown recent increases.

In addition, changes in retirement plans made it necessary for BLS to gain a better understanding of whether defined contribution plans were offered as a replacement for defined benefit plans or whether employees now had both plans available. When first introduced in the 1980s, many employers added 401(k) plans as an addition to their existing defined benefit plan. But, over time, the share of workers participating in defined benefit plans continued to decline while overall retirement plan coverage remained stable. Intuitively, this movement meant that fewer workers had both plans. But how best to tabulate and express this change?

Throughout the 1990s, BLS provided separate data for those who participated in any retirement plan, in a defined benefit plan, and in a defined contribution plan. Through a little math manipulation, some sense of the share of workers with both plans is possible but with a large degree of uncertainty. Throughout the 1990s, the estimated share of workers with both plans was consistently around 30 percent. The share with only a defined benefit plan declined from 30 percent to 22 percent over the decade, and there was a nearly identical rise in the share of employees with only a defined contribution plan. (See chart 5.)

To gather more precise information on retirement plan participation, BLS began asking employers to provide counts of workers with various combinations of retirement plans in the late 1990s. This proved challenging because employers often did not keep records in the desired manner and were not always able to provide separate counts of workers in one plan versus workers in a combination of plans. Despite these data collection challenges, BLS was able to publish greater detail on retirement plan combinations, which confirmed the trend toward sole coverage by a defined contribution plan. By 2023, only 3 percent of all private industry workers had access to only a defined benefit plan, 12 percent had access to both plans, and 56 percent only had access to a defined contribution plan.¹¹

Another challenge related to counting the share of workers with certain benefits is the trend toward employers “freezing” their defined benefit plans. Employers can terminate their plan and use assets to provide benefits to plan participants, often through the purchase of an annuity. Following such a termination, BLS would report zero workers with a defined benefit plan at a company. But other variations on plan freezes can be more problematic to track. In some cases, employers continue the defined benefit plan for existing participants but do not allow any new participants. Here, BLS includes only those workers accruing benefits as plan participants. Alternatively, employers may maintain the defined benefit plan for existing participants but without accruing any further benefits. Currently, such workers are counted as offered a plan and participating in a plan, and additional information is published that shows the share of employees who no longer accrue benefits. In addition to tracking the declining availability of defined benefit plans in the private sector, recent BLS data show that about 40 percent of participants in a defined benefit plan were in plans that had instituted some type of freeze.¹²

Generally, capturing, tabulating, and reporting on retirement plan features, whether defined benefit or defined contribution, continue to pose challenges because of the wide variety of provisions. Unlike other BLS statistics, such as the unemployment rate, the Consumer Price Index, or productivity measures, the details of retirement benefits (and, in fact, most employee benefits) do not lend themselves to a single number. And the more detail that is displayed, the more difficult it may become to understand the key features of a plan.

Consider the various options that have been used to identify the age and service requirements for normal retirement in defined benefit plans. Table 1 shows the traditional BLS approach to presenting this information, which is to provide every possible variation. The original publication of these tables even includes footnotes that identified rare features not specifically included in the table.¹³ Providing this amount of detail allows data users to find the most prevalent provisions, track whether their plan is similar to others, and identify any changes in plan features over time. If the main takeaway from table 1 is that normal retirement is frequently available at age 65, but many plans allow normal retirement at earlier ages with sufficient service, then all the additional detail may not be needed.

Table 2 shows a newer approach, which attempts to simplify the presentation and focus on the key points. In this table, the array of ages shown is reduced to two—age less than 65 and age 65—and the service requirements are similarly reduced. These entries are complemented by information on the median values—age 65 with 5 years of service. The takeaway in this case is largely the same as in the first table. Is this an improvement? Is the effort to capture, review, and tabulate the variety of details from thousands of plans worth the result? These are important questions to answer since part of the mission of BLS, as a fact-finding agency, is to provide reliable and clear information to the public. This may be a case where artificial intelligence could simplify the process and provide a clearer answer. In fact, BLS currently uses a variety of machine learning approaches to review and synthesize text and has experimented with such approaches on descriptions of employee benefits. As these processes mature, these approaches hold the potential to quickly distill the highlights of retirement plans.

Employer costs

In addition to looking at plan incidence and provisions, BLS tracks the employer costs of providing benefits to employees. In the Employer Expenditures for Employee Compensation survey that BLS produced from 1959 to 1977, BLS provided average employer expenditures for individual benefits. In 1966, private employers spent 2.6 percent of their compensation expenses on retirement benefits, nearly all of which was for defined benefit plans. And while the share of private employer compensation costs spent on retirement plans increased to 4.3 percent by 1977, defined contribution plans remained a minor part of the cost.¹⁴

In 1975, BLS introduced the Employment Cost Index (ECI), which–­–in parallel to the Consumer Price Index––tracks the cost to employers of a “basket” of workers. BLS identifies a representative sample of occupations across industries and captures employer costs for their wages and benefits over time. While the ECI is an important gauge of wage and benefit inflation, the source data are also used to show actual employer costs. These costs are represented as dollars per hour worked and the share of employer costs spent on individual benefits. This series, known as Employer Costs for Employee Compensation, began providing data on individual benefits in the mid-1980s. In 1987, private employers spent 48-cents-per-hour worked on retirement plans, with most (42 cents) going toward defined benefit plans (then referred to as simply “pension” plans) and the remainder (6 cents) going toward defined contribution plans (then referred to as “savings” plans). For the past 35 years, private employers have consistently spent between 3 percent and 4 percent of their compensation expenditures on retirement benefits, but, reflecting the shift in plan type, much of that cost is now spent on defined contribution plans. (See chart 6). In December 2023, employers spent about 70 percent of their retirement expenditures on defined contribution plans.¹⁵

Retirement plan metamorphosis

Change is the only constant when it comes to retirement plans in the past half century. Several features that traditionally were unique to defined benefit plans are now becoming common in defined contribution plans and vice versa. Here are a few examples:

• Plan participation: traditionally, new employees automatically participated in defined benefit plans once they met the age and service requirements, as such plans were provided at no cost to employees. In contrast, employees had to proactively sign up and agree to make contributions to participate in a defined contribution plan. What has changed is the introduction, and encouragement, of automatic enrollment features in defined contribution plans. With such features, new employees are automatically included in the plan, typically at a minimum contribution level, unless they proactively decline coverage. Some plans also have automatic escalation features, which increase the employee’s contribution periodically unless the employee makes a change.
• Individual accounts: traditionally, defined contribution plans established accounts for each participant, who could always know their account balance. In contrast, defined benefit plans were funded out of a single account. Participants knew how their future benefit was computed but did not have any indication of the current value. What has changed is the introduction of “cash balance” and related “hybrid” defined benefit plans, which identify amounts to be periodically deposited into the employee’s account, and the value of this account is always known. These accounts represent the present value of future benefits.¹⁶
• Portability: traditionally, vested account balances in defined contribution plans were available to employees who left their employer. In contrast, employees who left a defined benefit plan either lost all benefits or, if vested, gained the right to receive future benefits, often starting at the plan’s retirement age. What has changed is that cash balance defined benefit plans often make account balances for vested employees available upon separation from the company.¹⁷
• Distribution: traditionally, defined benefit plans paid benefits for life and included survivor benefits. In contrast, the most common distribution method for a defined contribution plan was a lump sum paid at retirement. Both types of plans have experienced changes. Cash balance defined benefit plans often provide the option to receive benefits in a lump sum. And many defined contribution plans now include the option to use benefits to purchase an annuity, which provides periodic benefits for life.

Where are we now?

In the half century since the passage of ERISA, the retirement landscape has changed dramatically. ERISA has been amended multiple times, generally to make it easier for employees to obtain retirement benefits. At the same time, employers continue to introduce alternative retirement arrangements that can both attract and retain workers while controlling costs. Today, defined benefit plans are rare in the private sector, with new hybrid variations that resemble defined contribution plans. The now predominant defined contribution plans incorporate newer features such as automatic enrollment and escalation, Roth contributions, investment in lifecycle funds, and the option to turn account balances into a lifetime annuity. BLS will continue to track these changes and strive to meet the challenges of how best to capture and describe plan coverage and key plan features.