Retirement Income from Employer Plans Increasing

Retirees across all income groups are collecting more retirement income from employer-sponsored retirement plans than in the mid-1970s.

An ICI study, “A Look at Private-Sector Retirement Income After ERISA, 2011” found that in 2011, 33% of retirees received income—either directly or through a spouse—from private-sector retirement plans, compared with 21% in 1975. The median income received by those with private-sector pension income was $6,300 in 2011 compared with about $4,700 in 1975 (in 2011 dollars). The research examines private-sector retirement income trends since 1974, just after the Employee Retirement Income Security Act (ERISA) was enacted.

The study also revealed that an increase in DC plan coverage over time has kept U.S. worker access to private-sector retirement plans steady since the 1970s. While coverage has been consistent, an increasing number of private-sector workers have worked for employers that sponsor defined contribution (DC) pension plans, while the number having worked for employers that sponsor defined benefits (DB) plans decreased. In 1975, nearly 90% of active participants in private-sector retirement plans had primary coverage through DB plans, dropping steadily over time to below 50% by the 1990s. By 1998, 44% of active participants in private-sector retirement plans had coverage through DB plans.

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Coverage by a pension plan does not always result in retirement income, the study found. The historical prevalence of retirement income from private-sector DB plans may be overstated by only looking at pension coverage, rather than receipt of pension income. Many retirees may have worked for companies that offered DB plans; however, because private-sector workers change jobs often, the combination of vesting rules and back-loaded benefit accrual resulted in many retirees getting little or no retirement income from private-sector retirement plans.

The ICI report also revealed Social Security benefits continue to serve as the foundation for retirement security in the U.S. and represent the largest component of retiree income and the predominant income source for lower-income retirees. In 2011, Social Security benefits were 57% of total retiree income and more than 85% of income for retirees in the lowest 40% of the income distribution.

“As policymakers consider retirement savings policies, it is important that they understand that private-sector pension income has tended to increase over time rather than decrease. The share of retirees receiving private-sector pension income increased by more than 50% between 1975 and 1991, and has remained fairly stable since,” said Peter Brady, ICI senior economist and coauthor of the report. Further, among those receiving income from private-sector pensions, the median amount of inflation-adjusted income—which had remained fairly flat between 1975 and 1991—has increased nearly 40% since 1991.”

The study was coauthored by Brady and ICI associate economist Michael Bogdan. More information can be found here.

DC Plans Could Use Some DB Plan Strategies

Defined contribution (DC) plans could improve participants' retirement outcomes by adopting practices of defined benefit (DB) plans and other institutional investors.

“The Path Forward: Importing Winning DB Strategies into DC Plans,” the third installment of Northern Trust’s research series on the future of DC plans, pinpoints best practices from investment models used by pension plans, endowments and foundations, and identifies how they can be implemented by DC plans to improve retirement outcomes for participants.

Executing a more disciplined investment approach, designing more efficient fee structures and encouraging participants to maintain their assets in the plan structure after retirement would all help to improve results in DC plans, Northern Trust found, but the survey also identified hurdles to implementing these practices, including resistance to perceived changes to benefits and concerns over fiduciary liability.   

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Nearly 70% of plan sponsors interviewed are optimistic that DC plans are capable of providing sufficient retirement income to working Americans. However, respondents also believe that DC plans could improve their chances of participant success by importing winning strategies from institutional investors, including: 

  • Investment Approach: Establish a streamlined investment menu that includes simplified pre-mixed default options, access to alternatives and cost effective investment strategies.  
  • Fee Structure: Minimize overall participant cost by utilizing institutional investment vehicles, maximizing the plan scale, conducting regular fee benchmarking and reducing or eliminating revenue sharing. 
  • Governance: Dedicate appropriate resources and attention in proportion to DC assets invested, create efficient decision-making process and be mindful of fiduciary liability.  
  • Decumulation: Enhance the plan’s decumulation strategy by providing education about distribution options, offering appropriate asset preservation and income generating investment products, and maintaining an ongoing dialogue with retirees.  
  • Communication: Maintain lifetime engagement with participants through personalized communications clearly focused on specific outcomes. 

(Cont’d…)

The survey found some gaps between identification and implementation of these best practices. While all consultants surveyed say they recommend a limit of 15 investment options to help participants make better choices, nearly half (46%) of plan sponsors maintain 16 to 25 options and 8% offer more than 25 options.   

Three-quarters of plan sponsors do not offer access to alternative asset classes. Mutual funds are the most popular investment vehicle, used by 79% of DC plan sponsors surveyed. However, the shift to collective investment trusts (CITs) is under way, with 73% of participating DC plan sponsors offering CITs and many remaining plans considering them for future use.   

As participants enter retirement, DC plans could improve outcomes by maintaining a relationship with retirees, so they continue to get the benefits of institutional pricing and professional oversight of investment options in the plan. Yet the survey found a significant portion of retirees take lump-sum payouts from their DC plans, and only 31% of plan sponsors encourage participants to keep their assets in the plan. Nearly two-thirds (65%) of plan sponsors offer income planning tools to retirees, and more than half (58%) offer income education and advice.   

Regarding issues from limiting investment options to keeping retirees in the DC plans, survey respondents identified potential roadblocks to adoption of strategies from defined benefit plans and other institutional investors. Plan sponsors cited resistance from participants, who tend to view any change as a loss of benefits. Concern about fiduciary liability can also be an impediment, although plan sponsors and consultants have differing views on its impact. While 66% of consultants said their plan sponsor clients voice concerns about fiduciary liabilities related to investment changes in their DC plan, only 25% of plan sponsor respondents said it is a significant concern.   

The research report can be found at http://www.northerntrust.com/pointofview/path-forward/index.html.

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