401(k) Pension Plans: Many Take Advantage of Opportunity to Ensure
Adequate Retirement Income (Letter Report, 08/02/96, GAO/HEHS-96-176).
Pursuant to a congressional request, GAO provided information on 401(k)
pension plans, focusing on: (1) the proportion of workers covered by
401(k) pension plans; (2) workers' contributions to their 401(k) pension
plans; and (3) how workers invest their pension account balances.
GAO found that: (1) half of all workers and nearly two-thirds of workers
nearing retirement age are covered by a pension plan; (2) one in four
workers participates in a 401(k) pension plan; (3) male, white, highly
educated, and higher-income workers are more likely to have pension
coverage than any other group; (4) one-third of the workers eligible to
participate in 401(k) plans do not participate in these plans; (5) union
members are more likely to have pension coverage than nonunion workers;
(6) more than 70 percent of all workers employed by large firms are
covered by at least one pension plan; (7) workers without a high school
diploma are unlikely to be covered by a pension plan and fewer than half
of the high school dropouts nearing retirement age have no pension
coverage; (8) 60 percent of college graduates have pension plans; (9) 60
percent of retirement age workers with incomes less than $25,000 are not
covered by a pension plan and rely on Social Security as their primary
source of income after retirement; (10) higher-income workers contribute
more to their pension plans than lower-income workers; (11) 25 percent
of 401(k) participants invest their funds in bonds, another 25 percent
invest in stocks, and the remaining participants split their investments
between both stocks and bonds; (12) women invest their 401(k) funds more
conservatively than men; and (13) workers investing their 401(k)
balances in stocks have greater retirement incomes.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-96-176
TITLE: 401(k) Pension Plans: Many Take Advantage of Opportunity to
Ensure Adequate Retirement Income
DATE: 08/02/96
SUBJECT: Retirement pensions
Funds management
Bonds (securities)
Stocks (securities)
Employee retirement plans
College students
Social security benefits
Investment planning
Retirement benefits
Income maintenance programs
IDENTIFIER: Social Security Program
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Social Security, Committee on
Ways and Means, House of Representatives
August 1996
401(K) PENSION PLANS - MANY TAKE
ADVANTAGE OF OPPORTUNITY TO ENSURE
ADEQUATE RETIREMENT INCOME
GAO/HEHS-96-176
401(k) Pension Plans
(105692)
Abbreviations
=============================================================== ABBREV
CODA - cash or deferred arrangement
EBRI - Employee Benefit Research Institute
HRS - Health and Retirement Survey
SCF - Survey of Consumer Finances
Letter
=============================================================== LETTER
B-270758
August 2, 1996
The Honorable Jim Bunning
Chairman
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives
Dear Mr. Chairman:
Traditionally, the three cornerstones of retirement income have been
Social Security, private pensions, and savings. Families headed by
people aged 65 or older receive, on average, about 60 percent of
their income from Social Security, 15 percent from pensions and
annuities, 11 percent from asset income, and the rest from earnings
and public assistance. While Social Security coverage is mandatory
and nearly universal, it is not designed to provide adequate
retirement income by itself: Social Security replaces about 42
percent of the final-year earnings of a worker earning the Social
Security average wage of $23,500. Pensions and savings are usually
needed to fill the gap between Social Security payments and an
adequate retirement income.
With the growth in 401(k) pension plans,\1 many workers have more
opportunity to affect their retirement income because they can choose
their contribution levels and how their pension assets are invested.
Given this trend toward increased worker responsibility for
retirement income, you requested that we provide you with answers to
the following questions: (1) What proportion of workers are covered
by pension plans and, in particular, 401(k) pension plans? (2) How
much do workers covered by 401(k) plans contribute to their pension
accounts? (3) How do workers covered by 401(k) plans allocate their
pension account balances among various investment options? This
report also examines how the answers to these questions differ by
demographic group.
To answer these questions we analyzed two nationally representative
databases containing detailed demographic and employment information
about American workers in 1992, the latest year for which data were
available. We also solicited comments from outside pension experts.
We did our work between November 1995 and July 1996 in accordance
with generally accepted government auditing standards. (For further
details on our scope and methodology, see app. I.)
--------------------
\1 401(k) pension plans are salary reduction plans that allow
participants to contribute, before taxes, a portion of their salary
to a retirement account. Many employers also match workers'
contributions to these accounts.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Many workers will be able to fill the gap between Social Security and
an adequate retirement income with income from pensions. However,
some groups of workers, primarily those with low income and less
education, are at risk of receiving little or no pension income.
Almost half of all workers and nearly two-thirds of workers nearing
retirement age are covered by a pension plan. One in four workers
who have pension coverage participates in a 401(k) pension plan.
Male, white, highly educated, and higher-income workers are more
likely to have pension coverage than are other workers. Moreover,
most union members are covered by a pension plan as are most people
working for large employing organizations, or firms (500 or more
employees). In contrast, over half of the workers who never
graduated from high school and are nearing retirement age have no
pension coverage.
Workers with 401(k) pension plans determine the level of their
retirement income, in part, by the amount they contribute to their
pension account: the more they contribute, the more income they will
have after retirement. On average, workers covered by a 401(k) plan
contribute about 7 percent of their salary to their account; 80
percent also receive a matching contribution from their employer,
averaging about 5 percent of their salary. Workers with higher
income or those who attended college tend to contribute a higher
proportion of their salary to their 401(k) pension account than
lower-income or less educated workers. Furthermore, workers with
401(k) plans who are also covered by a defined benefit plan or who
have a spouse who has pension coverage make larger contributions to
their accounts than other workers.
Many workers are responsible for directing the investment of their
401(k) pension plan account balances. About 25 percent of 401(k)
participants invest their 401(k) funds in conservative investments,
such as bonds; another 25 percent invest primarily in stocks; and the
rest split their investments between stocks and bonds. Women tend to
invest their funds more conservatively than men do and are more
likely to invest mostly in bonds. In addition, highly educated
workers and higher-income workers are more likely to invest in stocks
than other workers are. Over the long term, since stock market
returns historically have been greater than the returns on bonds,
workers investing their 401(k) pension plan account balances in
stocks are likely to have greater retirement income than are more
conservative investors, given equal contributions.
BACKGROUND
------------------------------------------------------------ Letter :2
Most financial planners report that retirement income that is 60 to
80 percent of final-year earnings is adequate to maintain a
reasonable standard of living in the retirement years. Social
Security benefits alone are not designed to maintain the standard of
living enjoyed before retirement. For example, Social Security
replaces from about 60 percent to less than 25 percent of final-year
earnings for people who have worked 35 years. Low-income elderly
Americans have very little income other than Social Security--almost
80 percent of their income is from Social Security--while the
high-income elderly receive about 25 percent of their income from
Social Security. Part of this difference is due to the fact that the
low-income elderly receive less than 10 percent of their income from
pensions and asset income, compared with 35 percent for the
high-income elderly.
There are two basic types of pension plans: defined benefit and
defined contribution plans. Pension benefits in defined benefit
plans are generally based on a formula of years with the firm, age at
retirement, and salary averaged over some number of years. In
defined contribution plans, employers generally promise to make
guaranteed periodic contributions to workers' accounts, but
retirement benefits are not specified.
Pension coverage rates in this country increased after the turn of
the century but have remained fairly stable since 1972, at about 49
percent of all workers and about 56 percent of all full-time workers.
However, the number of defined contribution plans, as compared with
defined benefit plans, has grown. Defined contribution plans as a
percentage of all pension plans grew from 67 percent in 1975 to 87
percent in 1992. Similarly, the percentage of pension participants
in defined contribution plans grew from 29 percent in 1975 to 60
percent in 1992.
Much of the growth in defined contribution pension plans has been due
to the increase in the number of 401(k) pension plans. In 1992,
401(k) plans accounted for 20 percent of all pension plans and 35
percent of all pension plan participants. Named after the section of
the Internal Revenue Code that established them in 1978, 401(k) plans
allow employees to contribute before-tax dollars to a qualified
retirement account. Investment income earned on 401(k) account
balances accumulates tax free until the individual withdraws the
funds at retirement. Furthermore, many employers sponsoring 401(k)
plans make matching contributions to these plans.
HALF OF ALL WORKERS ARE COVERED
BY PENSION PLANS, AND CERTAIN
GROUPS ARE MORE LIKELY TO BE
COVERED THAN OTHERS
------------------------------------------------------------ Letter :3
Although almost half of all American workers are covered by a pension
plan, certain groups--such as unionized workers and those who work at
large firms--are more likely to have this coverage. Workers with
less education and lower income are less likely to be covered by
pensions.
MANY WORKERS COVERED BY
PENSION PLANS
---------------------------------------------------------- Letter :3.1
Almost half of all workers are covered by at least one pension plan.
Almost two out of three workers nearing retirement age are covered by
a pension plan. The majority of covered workers participate in a
defined contribution plan, and nearly half of these workers are
covered by a 401(k) plan. However, a third of workers eligible to
participate in a 401(k) plan do not participate.
UNIONIZED WORKERS AND
WORKERS AT LARGE FIRMS MORE
LIKELY TO HAVE PENSION
COVERAGE
---------------------------------------------------------- Letter :3.2
Union members are more likely to have pension coverage than nonunion
workers. Almost 80 percent of all unionized workers and nearly 90
percent of unionized workers nearing retirement age are covered by a
pension plan. On the other hand, almost 60 percent of nonunionized
workers are not covered by a pension plan. Most unionized workers
who are covered by a pension plan participate in a defined benefit
plan, while only 15 percent participate in a 401(k) plan.
In addition, most workers at firms with 500 or more employees are
covered by a pension plan. Over 70 percent of all workers and over
90 percent of older workers at large firms are covered by at least
one pension plan. Workers at small firms (fewer than 25 employees)
typically are not covered by a pension plan. In general, the larger
the firm the more likely a worker is to be covered by a pension plan.
MANY WORKERS WITH LESS
EDUCATION AND LOWER INCOME
ARE WITHOUT PENSION COVERAGE
---------------------------------------------------------- Letter :3.3
Workers who have not finished high school are unlikely to be covered
by a pension plan (see fig. 1). More than three of every four
workers who drop out of school have no pension coverage. Fewer than
half of dropouts who are nearing retirement age have pension
coverage. Almost 60 percent of college graduates, on the other hand,
are covered by a pension plan, and over 75 percent of college
graduates who are approaching retirement age are covered.
Figure 1: Percentage of
Workers 18 to 64 Years of Age
With No Pension Coverage by
Educational Level, 1992
(See figure in printed
edition.)
Lower-income workers typically have no pension coverage. For
example, 60 percent of the workers with income less than $25,000 per
year who are nearing retirement have no pension coverage and will
have to rely on Social Security as their primary source of income
after retirement (see fig. 2). Less than 20 percent of
higher-income older workers are not covered by a pension plan. (For
more information on pension coverage, see app. II.)
Figure 2: Percentage of
Workers 51 to 61 Years of Age
With No Pension Coverage by
Income Level, 1992
(See figure in printed
edition.)
WORKERS WITH MORE ECONOMIC
SECURITY CONTRIBUTE MORE TO
401(K) PENSION PLANS
------------------------------------------------------------ Letter :4
Retirement benefits for workers with 401(k) pension plans depend on
how much the worker contributes to the plan, and higher-income
workers tend to contribute more to their pension plan than
lower-income workers. For example, workers with an annual income
over $75,000 contribute, on average, over 8 percent of their salary,
while workers with less than $25,000 in annual income contribute less
than 5 percent. Moreover, less educated workers generally contribute
less than more highly educated workers. Furthermore, workers who are
also covered by a defined benefit plan or who have a spouse with
pension coverage contribute a larger fraction of their salary to
their 401(k) account than other workers. (For more information on
contribution rates to 401(k) pension accounts, see app. II.)
INVESTMENT CHOICES FOR PENSION
ACCOUNTS AFFECT RETIREMENT
INCOME
------------------------------------------------------------ Letter :5
In addition to the amount contributed, retirement benefits depend on
the return achieved by a worker's 401(k) fund investments.
Historically, over the long term, common stocks have yielded the
highest investment returns and government securities the lowest (see
fig. 3).
Figure 3: Compound Annual
Return on Various Investments,
1968-87
(See figure in printed
edition.)
Almost half of all workers invest their 401(k) account funds in a
diversified portfolio of stocks and bonds (see fig. 4).
Figure 4: Allocation of 401(k)
Pension Balances Among
Investment Options by All
Workers 18 to 64 Years of Age,
1992
(See figure in printed
edition.)
About a quarter of the workers are aggressive investors, investing
mostly in stocks. The remaining 25 percent invest conservatively in
bonds. However, different demographic groups exhibit distinct
investment patterns. For example, female workers nearing retirement
are more conservative investors than are older male workers (see fig.
5).
Figure 5: Allocation of 401(k)
Account Balances Among
Investment Options by Male and
Female Workers 51 to 61 Years
of Age, 1992
(See figure in printed
edition.)
Workers with more education and higher-income workers are more
aggressive investors and are more likely to invest mostly in stocks
than are less educated workers and lower-income workers. (For more
information on the allocation of 401(k) pension assets among various
investment options, see app. II.)
SUMMARY AND CONCLUSIONS
------------------------------------------------------------ Letter :6
At retirement, over 60 percent of workers have pension coverage and
will receive some pension benefits during retirement, although some
families do not receive much retirement income from pensions.
Higher-income workers and better educated workers are more likely to
be covered by a pension plan than are other workers. In addition,
higher-income workers and better educated workers with 401(k) pension
plans tend to contribute a larger proportion of their salary to their
pension account and to invest their pension funds in higher yielding
assets than do other 401(k) plan participants. Consequently, while
many workers will have sufficient retirement income, some workers,
especially those with less education and lower income, will be at
risk of inadequate retirement income.
COMMENTS
------------------------------------------------------------ Letter :7
We asked two pension plan experts to comment on a draft of this
report. They generally agreed with the study approach and results.
They made a few technical suggestions, which we incorporated where
appropriate.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Secretary of Labor,
relevant congressional committees, and other interested parties.
This report was prepared under my direction. Please contact Thomas
L. Hungerford, Senior Economist, at (202) 512-7028 if you or your
staff have any questions concerning this report.
Sincerely yours,
Jane L. Ross
Director, Income Security Issues
SCOPE AND METHODOLOGY
=========================================================== Appendix I
We addressed the following three questions to determine how
well-prepared workers are for retirement:
-- What proportion of workers are covered by pension plans and, in
particular, 401(k) pension plans?
-- How much do workers covered by 401(k) plans contribute to their
pension accounts?
-- How do workers covered by 401(k) plans allocate their pension
account balances among various investment options?
We also examined how the answers to these questions differ by
demographic group. To do this work, we reviewed the relevant
technical literature, talked to pension experts, and analyzed two
data sources: the 1992 Survey of Consumer Finances (SCF), prepared
by the Federal Reserve, and the first wave of the Health and
Retirement Survey (HRS), prepared by the University of Michigan
Survey Research Center. These databases provided nationally
representative individual-level data rather than data from a limited
number of specific pension plans or aggregated pension plan data,
which have been used by other researchers in the past.
1992 SURVEY OF CONSUMER
FINANCES
--------------------------------------------------------- Appendix I:1
SCF asked a random sample of respondents in 3,906 households
questions regarding their own and their spouses' current and past
employment, family asset holdings and debts, and demographic
information. Included in the current employment questions were
detailed questions about pension coverage. From SCF, we created a
data set containing information on respondents and/or their spouses
who were working at the time of the survey. The sample we used for
our analysis contained information on 4,181 working individuals who
were between the ages of 18 and 64 in 1992. Primary respondents
composed about two-thirds of the sample, and respondents' spouses
composed the other third. Sample weights were used throughout our
analysis. The advantage of using SCF is that it contains very
detailed information on earnings, assets, and pensions of households
and is representative of all age groups. On the other hand, its
sample size is relatively small.
HEALTH AND RETIREMENT SURVEY
--------------------------------------------------------- Appendix I:2
The first wave of HRS was conducted in 1992. The sample was composed
of families with at least one family member between the ages of 51
and 61. The survey asked the primary respondent and his or her
spouse questions regarding their current and past employment
(including pension coverage), family asset holdings and debts, and
demographic information. The database contained one observation each
for the primary respondent and spouse. The sample contained
information on 5,403 working individuals, about two-thirds of whom
were primary respondents and one-third of whom were spouses. Sample
weights were used throughout our analysis. The primary advantage of
using HRS is its relatively large sample of individuals nearing
retirement age.
CONSTRUCTION OF VARIABLES
--------------------------------------------------------- Appendix I:3
To answer the first research question, we constructed a categorical
variable that first divided the samples into two parts: individuals
with no current pension coverage and those with pension coverage. In
the second step, we further divided those with current pension
coverage into three categories. The first category includes all
individuals with a defined benefit plan but no defined contribution
plan. The second includes all individuals with a defined
contribution plan (whether or not they were also covered by a defined
benefit plan) but no 401(k) plan. The last category includes all
individuals with a 401(k) plan (whether or not they were covered by
another pension plan).
The variable created to examine the second research question is the
percentage of salary that the worker contributes to his or her 401(k)
plan account. The sample is restricted to only those workers who
contribute to a 401(k) pension plan.
The third variable is a categorical variable indicating how the
worker allocated his or her 401(k) pension balance among various
general investments. Both surveys asked almost identical questions
on asset allocation.\2 The sample was restricted only to those
workers with 401(k) plans who knew how their pension account balances
were invested.
As we addressed each successive question, the sample size of both
data sets became smaller. We tried to create the same variables and
variable categories for each data set. However, in some cases,
categories for the same variable differed between our two samples
because of slightly different classifications used in the two data
sets.
--------------------
\2 SCF asked, "How is the money in this account invested? Is it
mostly in stocks, mostly in interest earning assets, is it split
between these, or what?" HRS asked, "Is the money in this account
invested mostly in stocks, mostly in interest earning assets, is it
about evenly split between these, or what?" Interest earning assets
include government and corporate bonds and guaranteed insurance
contracts.
SUPPLEMENTARY ANALYSIS
========================================================== Appendix II
This appendix contains supplementary tables and more detailed
information about pension coverage, contributions to 401(k) pension
plans, and allocation of 401(k) plan account balances across the
various investment choices. Cross-tabular results from the two
databases, as well as a review of the relevant literature, are
presented.
PURPOSE AND TYPES OF PENSIONS
-------------------------------------------------------- Appendix II:1
Pensions are deferred compensation paid to the worker by the
employer. Workers desire pensions because they are a tax-preferred
and convenient means for saving for retirement. Employers also may
benefit from offering pension coverage because pensions are a human
resource tool. Pensions function as a device for attracting
productive workers, reducing turnover, increasing work effort, and
inducing older workers to retire when their productivity falls.
Employing organizations, or firms, offer two general types of pension
plans: defined benefit plans and defined contribution plans. The
differences between defined benefit and defined contribution pension
plans are elucidated by the following formula, which shows the
relationship between the present value of benefits and the present
value of contributions:
BENEFITS = CONTRIBUTIONS + ASSET YIELD
Once any two of the three components are chosen, the third is
automatically determined. The main difference between defined
benefit and defined contribution plans is which two components are
chosen.
In defined benefit plans, pension benefits are set when the worker is
first employed at the firm (generally based on a formula of years
with the firm, age at retirement, and salary averaged over some
number of years). The firm makes contributions to the pension
account; invests the assets to earn a return; and, when the worker
retires, pays benefits. The firm's contributions depend on the asset
yield. If the firm invests pension assets wisely and earns a high
return, then its contributions to the pension account can be lower.
However, if the investments do not do well, the firm must make up any
shortfall with higher contributions. All responsibility for
contributions and risks of investment are borne by the firm. The
worker, however, bears the risks of uncertain future wages and job
turnover.
In contrast, defined contribution plans shift some or all of the
responsibility to the worker. In almost all defined contribution
plans, the workers make the contribution to their pension account.\3
The amount of the worker's contribution depends on his or her desired
level of retirement benefits and ability to contribute. In addition,
many plans shift the investment risk to the worker by allowing the
worker to direct the allocation of pension assets to various
investments. In this arrangement, workers are completely responsible
for the amount of their benefits at retirement. However, workers
receive what is in their defined contribution accounts (contributions
plus investment returns) if they leave the firm before retirement.
Salary reduction plans, also known as cash or deferred arrangements
(CODA), are one type of defined contribution plan. These plans allow
participants to contribute, before taxes, a portion of their salary
to a retirement account. The various salary reduction plans are
named after the section of the Internal Revenue Code that establishes
rules for the plans. The 401(k) is a CODA plan for the private
for-profit sector; the 403(b) is a CODA plan for the not-for-profit
sector; and the 457 is a CODA plan for state and local governments.
--------------------
\3 In profit-sharing plans, contributions are determined at the
employer's discretion.
IMPORTANCE OF PENSION INCOME
-------------------------------------------------------- Appendix II:2
The poorest 20 percent of elderly families are very dependent on
Social Security--receiving over 75 percent of their income from
Social Security, on average. These families receive less than 5
percent of their income from pensions. In contrast, elderly families
in the top 20 percent of the income distribution receive about a
quarter of their income from Social Security and 13 percent from
pensions. Furthermore, over 25 percent of elderly families who
receive Social Security and no pension income are poor. On the other
hand, less than 2 percent of elderly families receiving both Social
Security and pension income are poor.
PENSION COVERAGE
-------------------------------------------------------- Appendix II:3
Slightly less than half of all workers aged 18 to 64 are covered by a
pension. About 27 percent are covered by a defined contribution
plan, and the other 21 percent participate in a defined benefit
plan.\4 Of those covered by a defined contribution plan, almost half
participate in a 401(k) or other CODA plan. Pension coverage for
those workers nearing retirement age (51 to 61 years of age) is,
however, much higher: Almost two-thirds are covered by a pension
plan. Almost 30 percent are covered by a defined benefit plan, and
17 percent participate in a 401(k) plan. (See table II.1.) The
Employee Benefit Research Institute (EBRI) reports that 57 percent of
all civilian workers work for an employer that sponsors a pension
plan. About three-quarters of these workers participate in their
employer's plan.\5
Table II.1
Comparison of Pension Coverage of All
Workers Aged 18 to 64 With That of
Workers Aged 51 to 61
(Figures are percentages)
Worker Worker
s 18 s 51
to 64 to 61
(SCF (HRS
sample sample
) )
------------------------------------------------------ ------ ------
No pension coverage 52.0 34.4
Defined benefit pension plan 21.0 29.6
Defined contribution pension plan 14.0 19.0
401(k) or CODA pension plan 13.1 17.0
----------------------------------------------------------------------
Note: Columns may not total 100 percent because of rounding.
--------------------
\4 Many workers are covered by more than one pension plan. We
divided workers into pension coverage categories as follows: any
worker who participates in a 401(k) or other CODA plan is identified
as having a 401(k) plan regardless of other pension plan coverage.
Workers who are covered by a defined contribution plan but not by a
401(k) or other CODA plan are classified in the defined contribution
group whether or not they are covered by a defined benefit plan.
Workers who are covered by a defined benefit plan but no defined
contribution plan are placed in the defined benefit plan category.
\5 EBRI, Employment-Based Retirement Income Benefits: Analysis of
the April 1993 Current Population Survey, EBRI Special Report SR-25
(Washington, D.C.: EBRI, Sept. 1994).
WORKERS WITH CERTAIN
DEMOGRAPHIC CHARACTERISTICS
HAVE PENSION COVERAGE
------------------------------------------------------ Appendix II:3.1
Regardless of age, male workers are more likely to participate in a
pension plan than are female workers. Half of all male workers have
pension coverage, while 45 percent of female workers are covered.
The gender disparity in pension coverage is more pronounced for
workers nearing retirement age: Over 70 percent of male workers are
covered, compared with 60 percent of female workers. (See table
II.2.)
Table II.2
Type of Pension Coverage of Workers With
Various Demographic Characteristics
(Figures are percentages)
No Defined
pensio Defined contribu
n benefit tion 401(k)
covera pension pension pension
ge plan plan plan
-------------------------------- ------ -------- -------- --------
Workers 18 to 64 (SCF sample)
----------------------------------------------------------------------
Sex
----------------------------------------------------------------------
Male 49.4 22.0 15.5 13.2
Female 54.9 19.8 12.3 13.0
Race
----------------------------------------------------------------------
White 50.6 20.8 14.1 14.5
Black 46.4 27.7 18.4 7.5
Education
----------------------------------------------------------------------
Dropout 75.9 12.5 7.7 3.9
High school diploma 56.8 19.9 13.2 10.1
Some college 51.2 21.1 13.9 13.9
College degree 40.8 24.4 16.7 18.1
Household income
----------------------------------------------------------------------
Less than $25,000 73.4 14.5 8.7 3.5
$25,000 to $34,999 52.4 23.1 10.5 14.0
$35,000 to $44,999 45.8 23.8 16.3 14.2
$45,000 to $59,999 41.9 26.4 15.8 15.8
$60,000 to $74,999 33.8 25.5 23.0 17.6
$75,000 or more 40.1 19.5 17.3 23.1
Workers 51 to 61 (HRS sample)
----------------------------------------------------------------------
Sex
----------------------------------------------------------------------
Male 28.7 31.2 20.7 19.4
Female 40.4 27.9 17.2 14.5
Race
----------------------------------------------------------------------
White 32.7 29.3 19.8 18.1
Black 38.2 37.1 14.0 10.7
Education
----------------------------------------------------------------------
Dropout 51.0 25.9 13.7 9.4
High school diploma 36.9 29.1 18.0 16.0
Some college 30.4 28.0 21.3 20.3
College degree 25.6 28.0 25.9 20.5
Graduate degree 12.0 44.6 19.6 23.9
Household income
----------------------------------------------------------------------
Less than $25,000 60.3 19.9 12.7 7.1
$25,000 to $34,999 42.4 27.9 16.5 13.3
$35,000 to $44,999 33.6 32.2 18.9 15.3
$45,000 to $59,999 28.6 34.5 19.0 17.9
$60,000 to $74,999 22.3 32.8 23.3 21.6
$75,000 or more 19.5 31.5 23.6 25.4
----------------------------------------------------------------------
Note: Rows may not total 100 percent because of rounding.
There are also racial disparities in pension coverage. Table II.2
shows that black workers nearing retirement age are slightly more
likely to be without pension coverage than white workers. Black
workers are also more likely to be covered by a defined benefit plan,
and white workers are more likely to participate in a 401(k) pension
plan.
In addition, highly educated workers are more likely to be covered by
a pension plan than less educated workers. For example, 60 percent
of workers with a college degree have pension coverage, compared with
only 25 percent of workers who never graduated from high school.
This educational disparity in pension coverage also exists for
workers aged 51 to 61: Less than half of dropouts are covered, while
about 75 percent of college graduates are covered. A similar trend
is seen for 401(k) pension plan coverage: More educated workers are
more likely to participate in 401(k) pension plans than less educated
workers.
Many of the same trends are apparent when examining pension coverage
by level of household income. Workers living in families with higher
income levels are generally more likely to be covered by a pension
plan and are more likely to participate in a 401(k) pension plan than
are lower income workers. The similarity in trends for educational
level and income level is due to the high correlation between
education and income: College graduates tend to earn more than high
school dropouts and thus live in families with higher incomes.
EMPLOYMENT CHARACTERISTICS
ARE AN IMPORTANT DETERMINANT
OF WHO HAS PENSION COVERAGE
------------------------------------------------------ Appendix II:3.2
Part-time workers are the least likely to be covered by a pension
plan. Over all ages, about 10 percent of part-time workers have
pension coverage, and less than a third of part-time workers nearing
retirement are covered. Over half of all full-time workers
participate in a pension plan, and over 70 percent of full-time
workers nearing retirement age are covered. (See table II.3.)
Table II.3
Type of Pension Coverage of Workers
Based on Employment Characteristics
(Figures are percentages)
No Defined
pensio Defined contribu
n benefit tion 401(k)
covera pension pension pension
ge plan plan plan
-------------------------------- ------ -------- -------- --------
Workers 18 to 64 (SCF sample)
----------------------------------------------------------------------
Work status
----------------------------------------------------------------------
Part-time 87.3 6.9 2.9 2.9
Full-time 46.4 23.2 15.7 14.7
Union status
----------------------------------------------------------------------
Union member 21.9 46.1 20.5 11.5
Nonunion 59.8 14.4 12.3 13.5
Firm size (number of workers)
----------------------------------------------------------------------
Fewer than 20 87.0 6.5 4.9 1.7
20 to 99 61.7 16.0 12.5 9.8
100 to 499 46.8 25.5 13.8 13.9
500 or over 27.8 30.4 20.4 21.4
Workers 51 to 61 (HRS sample)
----------------------------------------------------------------------
Work status
----------------------------------------------------------------------
Part-time 68.3 17.2 8.6 5.8
Full-time 28.2 31.9 20.9 19.0
Union status
----------------------------------------------------------------------
Union member 12.0 54.5 18.5 15.1
Nonunion 42.7 20.3 19.2 17.7
Firm size (number of workers)
----------------------------------------------------------------------
Fewer than 25 59.1 16.4 14.2 10.4
25 to 99 28.7 35.0 19.6 16.7
100 to 499 20.6 34.9 21.1 23.4
500 or over 9.0 35.8 28.0 27.3
----------------------------------------------------------------------
Note: Rows may not total 100 percent because of rounding.
Workers who are members of a union are more likely to have pension
coverage than nonunion workers. Furthermore, most union members with
pension coverage are covered by a defined benefit plan. Nonunion
members with pension coverage are generally equally likely to
participate in a defined benefit plan, a defined contribution plan,
or a 401(k) pension plan.
Pension coverage is highly dependent on the size of the firm. Table
II.3 shows that about 15 percent of workers in firms with fewer than
20 employees are covered by a pension plan. Over 70 percent of
employees at large firms (500 or more employees) are covered. While
older workers are more likely to have pension coverage, about 40
percent of workers nearing retirement age and working at a small firm
(fewer than 25 employees) are covered by a pension plan. More than 9
out of 10 older workers at large firms are covered by a pension plan.
EBRI reports that about two-thirds of the workers who are eligible to
participate in their employer's 401(k) plan actually do
participate.\6 For example, three-quarters of eligible workers aged
61 to 64 participate in their employer-sponsored 401(k) plan,
compared with about half of the 21- to 30-year-old age group.
Furthermore, fewer than half of the eligible low-income (less than
$15,000 per year) workers participate, in contrast to over 80 percent
of workers earning $50,000 or more per year. Various researchers
have examined other factors affecting participation in 401(k) plans,
and several have found evidence that employer matching of employee
contributions increases participation in 401(k) plans.\7
One team of researchers also found that employer-provided information
on 401(k) plans has a positive effect on employee participation
rates.\8
--------------------
\6 EBRI, Employment-Based Retirement Income Benefits .
\7 See Robert L. Clark and Sylvester J. Schieber, Factors Affecting
Participation Rates and Contribution Level in 401(k) Plans,
(Washington, D.C.: Watson Wyatt Worldwide, May 1996); Leslie E.
Papke, "Participation in and Contributions to 401(k) Pension Plans:
Evidence from Plan Data," Journal of Human Resources, Vol. 30, No.
2 (spring 1995); and Paul Yakoboski and Jack VanDerhei, Contribution
Rates and Plan Features: An Analysis of Large 401(k) Plan Data, EBRI
Issue Brief No. 174 (Washington, D.C.: EBRI, June 1996).
\8 Clark and Schieber, Factors Affecting Participation Rates and
Contribution Levels in 401(k) Plans.
CONTRIBUTION RATES
-------------------------------------------------------- Appendix II:4
As workers near retirement age, they tend to contribute a higher
proportion of their income to their 401(k) pension accounts than
younger workers. On average, workers with a 401(k) pension plan
contribute 6.8 percent of their salary, while workers 51 to 61 years
of age contribute 7.7 percent of their salary. Among older workers,
women tend to contribute a higher proportion of their income to their
401(k) plan than do men. However, male and female workers aged 18 to
64 appear to contribute about the same percentage of their salary.
(See table II.4.)
Table II.4
Average Contribution Rates to 401(k)
Pension Plans
(Figures are percentages)
Worker Worker
s 18 s 51
to 64 to 61
(SCF (HRS
sample sample
) )
------------------------------------------------------ ------ ------
Total 6.8 7.7
Sex
----------------------------------------------------------------------
Male 6.9 7.4
Female 6.6 8.2
Education
----------------------------------------------------------------------
Dropout 6.1 6.6
High school diploma 5.8 7.7
Some college 7.4 7.9
College graduate 6.9 7.7
Graduate degree \a 8.4
Household income
----------------------------------------------------------------------
Less than $25,000 3.7 5.5
$25,000 to $34,999 5.7 7.5
$35,000 to $44,999 7.2 7.1
$45,000 to $59,999 7.0 8.1
$60,000 to $74,999 6.3 7.7
$75,000 or more 7.9 8.4
Defined benefit pension plan
----------------------------------------------------------------------
Yes 8.0 8.5
No 6.2 7.0
Spouse with pension plan
----------------------------------------------------------------------
Yes 7.7 8.3
No 6.3 7.5
----------------------------------------------------------------------
\a Not applicable.
Workers with more education and higher-income workers tend to
contribute more to their 401(k) pension plans. On average, workers
aged 18 to 64 whose income is greater than $75,000 tend to contribute
more than double the proportion of their salary that workers with
income below $25,000 do. Most likely, low-income workers use more of
their income for meeting everyday living expenses than do
higher-income workers. Workers who also participate in a defined
benefit plan or who have a spouse covered by a pension plan
contribute a higher proportion of their salary to their 401(k) plans
than other workers. In addition, researchers have found that
employer matching enhances worker contribution rates to some
extent.\9 About 80 percent of all workers covered by a 401(k) plan
receive an employer matching contribution. The average employer
contribution is 4.8 percent of the worker's salary.
--------------------
\9 See Clark and Schieber, Factors Affecting Participation Rates and
Contribution Level in 401(k) Plans; Papke, "Participation in and
Contributions to 401(k) Pension Plans: Evidence from Plan Data;" and
Yakoboski and VanDerhei, Contribution Rates and Plan Features: An
Analysis of Large 401(k) Plan Data.
ASSET ALLOCATION
-------------------------------------------------------- Appendix II:5
Both of our samples show that almost half of the workers invest their
401(k) pension account in a diversified portfolio. About a quarter
are invested mostly in stocks, and the other quarter are invested
mostly in bonds and other interest earning assets (see table II.5).
It is impossible to judge whether a particular individual is
investing too conservatively without knowing his or her investment
horizon. Over periods of 20 to 30 years, stocks yield the greatest
compound annual return and government bonds and bills the lowest.
For example, from 1968 to 1987, the compound annual return on common
stocks was 9.3 percent, compared with 7.4 percent for Treasury Bills
and 7.3 percent for long-term government bonds. However, the
year-to-year fluctuation in stock returns is much greater than the
fluctuation in bond and bill returns. Nevertheless, investments in
stocks have historically outperformed investments in bonds over the
long term.
Table II.5
Allocation of 401(k) Pension Assets
Among Investment Options
Worker Worker
s 18 s 51
to 64 to 61
(SCF (HRS
sample sample
) )
------------------------------------------------------ ------ ------
Mostly stocks 28.4 26.4
Stocks and bonds 46.4 46.8
Mostly bonds 25.2 26.8
----------------------------------------------------------------------
WORKERS WITH DIFFERENT
DEMOGRAPHIC CHARACTERISTICS
HAVE DIFFERENT INVESTMENT
PATTERNS
------------------------------------------------------ Appendix II:5.1
Female workers appear to be more risk averse or conservative
investors than male workers. While roughly the same proportion of
male and female workers aged 18 to 64 years are invested mostly in
stocks, a larger proportion of male workers than female workers have
diversified portfolios and a smaller proportion are invested mostly
in bonds. The gender disparity is much wider for workers aged 51 to
61. Male workers are almost twice as likely to invest mostly in
stocks as female workers, and female workers are more likely to
invest mostly in bonds than male workers. (See table II.6.) Other
research confirms our finding that women tend to invest their pension
funds in safer and lower yield assets than men.\10
Table II.6
Allocation of 401(k) Account Balances
Among Investment Options by Workers With
Various Demographic Characteristics
(Figures are percentages)
Stocks
Mostly and Mostly
stocks bonds bonds
---------------------------------------------- ------ ------ ------
Workers 18 to 64 (SCF sample)
----------------------------------------------------------------------
Sex
----------------------------------------------------------------------
Male 27.1 49.7 23.2
Female 29.8 42.8 27.4
Education
----------------------------------------------------------------------
Dropout 30.0 13.3 56.7
High school diploma 24.8 49.8 25.4
Some college 22.4 53.9 23.6
College graduate 33.2 42.6 24.2
Household income
----------------------------------------------------------------------
Less than $25,000 20.3 61.4 18.3
$25,000 to $34,999 31.1 46.3 22.6
$35,000 to $44,999 27.0 43.9 29.1
$45,000 to $59,999 26.8 39.6 33.6
$60,000 to $74,999 39.0 35.8 25.2
$75,000 or more 25.5 54.9 19.5
Spouse with pension
----------------------------------------------------------------------
Yes 31.1 44.8 24.1
No 26.8 47.3 25.9
Workers 51 to 61 (HRS sample)
----------------------------------------------------------------------
Sex
----------------------------------------------------------------------
Male 31.8 43.5 24.7
Female 17.3 52.3 30.4
Education
----------------------------------------------------------------------
Dropout 25.4 40.2 34.4
High school diploma 23.8 46.0 30.2
Some college 23.2 56.6 20.2
College graduate 25.9 44.8 29.3
Graduate degree 37.6 39.7 22.7
Household income
----------------------------------------------------------------------
Less than $25,000 19.4 41.0 39.6
$25,000 to $34,999 21.1 44.7 34.3
$35,000 to $44,999 22.9 46.2 31.0
$45,000 to $59,999 20.2 52.1 27.6
$60,000 to $74,999 19.4 50.6 30.0
$75,000 or more 35.8 44.5 19.7
Spouse with pension
----------------------------------------------------------------------
Yes 29.1 47.9 23.0
No 24.8 46.2 29.0
----------------------------------------------------------------------
Workers with higher educational levels are more likely to invest
their pension assets primarily in stocks than are less educated
workers. Table II.6 shows that over half of all workers aged 18 to
64 who never graduated from high school are heavily invested in
bonds, while less than a quarter of college graduates invest mostly
in bonds. Older workers nearing retirement age who have a graduate
degree are the group most likely to invest mostly in stocks.
Workers with higher family income tend to invest more heavily in
stocks than low-income workers, although there are exceptions. Older
workers nearing retirement age with family income less than $25,000
are more than twice as likely to invest mostly in bonds than are
workers with family income more than $75,000. Furthermore, over a
third of the high-income older workers invest primarily in stocks,
compared with less than 20 percent of the lowest-income workers.
Other researchers have found similar results for defined
contributions in specific firms.\11
Workers with a spouse who has pension coverage are more likely to
invest mostly in stocks and are less likely to invest mostly in bonds
than workers with no spouse or a spouse with no pension coverage.
--------------------
\10 Richard P. Hinz, David D. McCarthy, and John A. Turner, "Are
Women Conservative Investors? Gender Differences in Participant
Directed Pension Investments," in Positioning Pensions for the Year
2000, Olivia Mitchell, ed. (Philadelphia: University of
Pennsylvania Press, 1996).
\11 Gordon P. Goodfellow and Sylvester J. Schieber, Investment of
Assets in Self-Directed Retirement Plans, (Washington, D.C.: Watson
Wyatt Worldwide, May 1995).
BIBLIOGRAPHY
=========================================================== Appendix 0
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2000, Olivia Mitchell, ed. Philadelphia: University of Pennsylvania
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*** End of document. ***