A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector

A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector

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December 27, 2021
A Visual Depiction of the Shift from Defined Benefit (DB) to
Defined Contribution (DC) Pension Plans in the Private Sector
Background
if he or she participated in more than one plan. In 2019, the
One of the notable trends in the U.S. retirement system over
most recent year for which there is data, private-sector DB
the past five decades is that private-sector employees have
plans had 12.6 million active participants, and private-
become less likely to be covered by defined benefit (DB)
sector DC plans had 85.5 million active participants.
pension plans and more likely to be covered by defined
contribution (DC) pension plans. Among all private-sector
Using active participants rather than total participants may
workers, 68% had access to either a DB or DC plan (or
better reflect the shift from DB to DC plans among
both) in 2021. Among these workers, 15% had access to a
workers. When individuals with DB plans leave their jobs
DB plan, 65% had access to a DC plan, and some had
or retire, they remain participants but are classified as
access to both.
inactive participants because they are still owed benefits by
the plan. Many individuals with DC savings roll over their
In DB plans (sometimes referred to as traditional pension
account balances to Individual Retirement Accounts (IRAs)
plans), participants receive benefits in retirement based on a
when they leave their jobs or retire and are no longer
formula that typically uses either (1) a combination of the
counted as participants. IRAs are tax-advantaged savings
worker’s length of service, an accrual rate, and the average
accounts that any worker can establish at a financial
of a certain number of final years’ salary or (2) a flat-dollar
institution. DC plans may allow participants to keep their
amount and the number of months or years the worker
assets in the plans after job change or retirement—these
participated in the plan. The benefit is usually paid as a
participants would be classified as inactive DC plan
monthly benefit in retirement for the life of the participant
participants.
and spouse, if married. Some DB plans allow participants to
take the benefit as a lump-sum dollar amount at retirement.
Factors Underlying the Shift
This general shift from DB to DC plans in the private sector
In DC plans, workers are provided individual accounts
occurred for a number of possible reasons. Employer costs
funded by their own contributions, contributions from their
are generally higher for DB plans than for DC plans,
employers, or both. DC plans do not provide guaranteed
because the benefit in a DB plan is typically funded entirely
income. The funds in the account experience investment
by the employer, while a smaller portion of the typical DC
gains and losses, and the contributions and earnings (if any)
plan benefit is from employer contributions.
are used as a source of income in retirement. Examples of
private-sector DC plans include profit-sharing plans, money
From an employer’s perspective, contributions to DC plans
purchase plans, 401(k) plans, 403(b) plans, and Employee
tend to be a more predictable cost than contributions to DB
Stock Ownership Plans (ESOPs).
plans are. This is because employer contributions to DB
plans may include additional contributions to make up for
Congress has expressed an interest in ensuring that
investment losses, whereas in DC plans employer
American workers have financially secure retirements by
contributions are typically based on a set formula that uses
providing numerous tax advantages for retirement plans in
employee compensation.
general and specifically regulatory oversight of private-
sector retirement plans. The policies that Congress enacts
In addition, DC plans are easier to administer than DB
have a role in shaping the types of retirement plans that
plans are. DB plan actuaries determine the value of benefits
employers choose, or do not choose, to offer.
earned by participants in a year and how much the plan
must set aside to fund those benefits, incorporating factors
Participant Data
such as likely retirement ages and mortality rates. DC plans
Figure 1 illustrates the decline of DB plan coverage and the
do not use any of these actuarial projections.
growth of DC plan coverage among private-sector workers
by showing the number of active participants in DB and DC
For some employees, DC plans may be preferable to DB
plans from 1975 to 2019. Active participants are individuals
plans because DC plan account balances are portable. When
who are earning credit under DB plans or are making, or are
individuals change jobs, they can transfer (i.e., roll over)
eligible to make, contributions to DC plans.
their account balances to IRAs or, often, to their new
employers’ plans. In contrast, DB plan benefits are not
In 1975, private-sector DB plans had a total of 27.2 million
portable, and the benefit formula typically takes into
active participants, and private-sector DC plans had 11.2
account the number of years a worker has worked for an
million active participants. Participant counts may be
employer. Employees who change jobs would not
slightly higher than the number of individuals with DB and
accumulate the same benefits as they would had they stayed
DC plans because an individual is counted more than once
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A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector
with one employer. On the other hand, DC plans place more
provisions that may have prevented some individuals in DB
decisions and risk for retirement income on the worker.
plans from receiving benefits and (2) the overall lower costs
of DC plans, which may have resulted in more employers
As a result of the shift, some have noted that the growth of
offering these plans.
DC plans since 1974 may have resulted in a greater share of
private-sector workers receiving income from retirement

plans. The reasons may include (1) lengthy vesting
Figure 1. Active Participants in Private-Sector Pension Plans
1975-2019

Source: U.S. Department of Labor, Employee Benefits Security Administration (EBSA), Private Pension Plan Bulletin Historical Tables and Graphs:
1975-2019, September 2021, Table E7, https://www.dol.gov/sites/dolgov/files/EBSA/researchers/statistics/retirement-bulletins/private-pension-
plan-bulletin-historical-tables-and-graphs.pdf.
Notes: Participant counts may be slightly higher than the number of individuals with DB and DC plans because an individual is counted more
than once if he or she participated in more than one plan. Active participants are individuals who are earning credit under DB plans or are
making, or are eligible to make, contributions to DC plans. The increase in active participants in DC plans from 2004 to 2005 is a result of a
change in the definition of active participants used by EBSA. See U.S. Department of Labor, Instructions for Form 5500, p. 17,
https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2020-
instructions.pdf.
For Further Information:
private-pension-plan-bulletin-historical-tables-and-
CRS Report R46366, Single-Employer Defined Benefit
graphs.pdf.
Pension Plans: Funding Relief and Modifications to
Funding Rules
Elizabeth A. Myers, Analyst in Income Security
John J. Topoleski, Specialist in Income Security
Employee Benefits Security Administration, Private
Pension Plan Bulletin Historical Tables and Graphs: 1975-
IF12007
2019, September 2021, https://www.dol.gov/sites/dolgov/
files/EBSA/researchers/statistics/retirement-bulletins/

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A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector

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