Retirement Plan Contributions, Benefits and Assets: Highlights From Form 5500 Reports

Tracking the flow of money into and out of different types of retirement plans can identify broad and sometimes dramatic trends and behavior. For example, benefit disbursements from defined contribution (DC) plans are more erratic than those from defined benefit (DB) plans, partly because DC disbursements fluctuate along with the stock market. Contributions to DB plans have been much more erratic than those to DC plans, due to changes in funded status driven by market fluctuations and the operation of funding laws that tightly controlled permitted and required contributions. So in some years DB plan sponsors that wanted to contribute to their plans could not, while in other years sponsors were forced to contribute large amounts.¹

These erratic conditions affect workers in two ways. First, the financial volatility under the old funding laws convinced many new plan sponsors to avoid DB plans and set up DC plans instead, or existing plan sponsors to replace their DB plans with DC plans, especially in recent years. From 1975 to 2005, the number of participants in DB plans with at least 100 participants increased somewhat, while the number of participants in DC plans with at least 100 participants increased significantly. Now there are more DC plan participants than DB plan participants. Second, the growth of DC plans relative to DB plans exposes more workers to greater financial risk, such as market conditions. This makes participants’ benefit payouts less deterministic and thus requires them to be more proactive when making retirement decisions and planning for their financial security.

To better understand these trends, we look at data from the Form 5500 series. As part of the Employee Retirement Income Security Act’s (ERISA) disclosure policy, the Form 5500 series is used by the U.S. Department of Labor (DOL) and the IRS to gather information about employee retirement, health and welfare plans. All organizations that sponsor an employee benefit plan subject to ERISA must file the Form 5500 annually, so the filings reveal important aggregate information about retirement plans, contributions, benefit disbursements and assets.

Our analysis looks at total participants, contributions, benefit disbursements and assets of retirement plans with at least 100 participants for 2005 and retirement plan trends since 1975.²

Year 2005 Reported Results
Table 1 shows the total participants, contributions, benefit payouts and assets in DB and DC plans for 2005.³ Table 2 shows the average contributions, average benefits and average assets per participant, and Table 3 shows the same data for active participants.⁴

Most participants — 58.3 million — were in profit sharing and thrift-savings plans (mainly 401(k) plans). Total participants in other defined benefit and cash balance plans followed, with 31.4 million and 10.1 million participants, respectively. There were 106.1 million private-sector participants in all types of retirement plans.

Most active participants — 48.5 million — were also in profit sharing and thrift-savings plans. There were only 5.1 million active participants in cash balance plans and 14.9 million active participants in other defined benefit plans. There were 73.3 million active participants in all plans.

Profit sharing and thrift-savings plans took in more contributions than any other type of retirement plan — $182,389 million (64 percent). Contributions to other defined benefit plans totaled $66,265 million (23 percent) and contributions to cash balance plans were $21,267 million (7.5 percent).

Contributions per participant in DC plans were higher than contributions per participant in DB plans. Both cash balance plans and other defined benefit plans averaged $2,110 per participant. Contributions to profit sharing and thrift-savings plans, and stock purchase plans, were much higher with an average of $3,130 per participant and $2,940 per participant, respectively.

However, DB plans had higher contributions per active participant than DC plans. Cash balance plans averaged $4,140 per active participant, and other defined benefit plans averaged $4,460 per active participant. Contributions to profit sharing and thrift-savings plans were only $3,760 per active participant, and contributions to stock bonus plans were $3,850 per active participant.

Most of the benefits disbursed from retirement plans in 2005 were from profit sharing and thrift-savings plans — $162,393 million (53 percent). Other defined benefit plans paid out $92,679 million (30 percent) in benefits, and cash balance plans paid out $39,695 million (13 percent). Although DC plans provided the most benefits in 2005, the average benefit disbursement per participant was highest for cash balance plans with $3,930 per participant. These plans are followed by stock bonus plans, which disbursed an average of $3,550 per participant.

In terms of average benefit disbursement per active participant, cash balance plans again had the highest average payouts — $7,730 per active participant. Other defined benefit plans were next with $6,240 per active participant. Stock bonus plans came in third — they paid out an average of $4,640 per active participant. It is important to note that cash balance plans typically pay out lump sums, which result in very high benefit disbursements per participant and per active participant.

Profit sharing and thrift-savings plans also held the most retirement plan assets in 2005 — $2,090,854 million (46 percent). Assets in other DB plans totaled $1,573,584 million (35 percent), and assets in cash balance plans came to $648,503 million (14 percent). Assets per participant were highest in cash balance plans — $64,250 per participant — and second-highest in other defined benefit plans — $50,160. Profit sharing and thrift-savings plans averaged only $35,860 per participant.

Assets per active participant were highest in cash balance plans as well, with $126,320 per active participant, and second-highest in other defined benefit plans, with $105,920 per active participant. Stock purchase plans ranked third with $64,410 per active participant.

To gain a better understanding of where the contributions come from, we separate the total contributions into several categories in Table 4. Employees made most of the contributions to DC plans, approximately $115,811 million (58.9 percent). About 5.5 percent ($10,769 million) of all DC contributions were from rollovers. However, employers made most of the contributions to DB plans — roughly $84,810 million (96.9 percent).

Table 5 shows the breakdown of assets in several categories by plan type. Assets in all retirement plans reached $4,535,250 million in 2005. Retirement plans held most of their assets in master trusts — $1,492,561 million (33 percent) — followed by registered investment companies —$997,381 million (22 percent) — and common/collective trusts — $475,104 million (10.5 percent).

DB and DC plans tend to invest in different investment vehicles. Most assets in DB plans were in master trusts — $959,591 million (43 percent) — followed by preferred and common stock at $358,714 million (16 percent) and common/collective trusts at $270,860 million (12 percent). Most assets in DC plans were in registered investment companies — $853,895 million (37 percent) followed by master trusts — $532,970 million (23 percent) and employer securities — $271,715 million. Twelve percent of DC plan assets were invested in employer securities.

It is important to note that ERISA and the tax code limit investments in company stock in DB plans to no more than 10 percent of plan assets. The only comparable limit for 401(k) plans is that they cannot require employees to invest more than 10 percent of their employee contributions in qualifying employer securities.

Form 5500 does not reveal actual investments in master trusts, common/collective trusts and other asset categories, so it is not possible to determine allocation strategies.

Trends
We next look at trends since 1975 — the year after ERISA was passed — in number of participants, contributions, benefit disbursements and assets.

Number of Participants
Figure 1 shows the number of participants in plans with more than 100 participants by plan type from 1975 to 2005. The number of participants in DB plans increased somewhat during this period, while the number of participants in DC plans increased significantly. Although the number of participants in all plans grew during this period, as stated earlier, Form 5500 does not indicate whether employees participate in both a DB and a DC plan sponsored by the same employer or participate in one or the other. The sharp uptick in the number of DC plan participants in 2005 is likely due to the change in the definition of “total participants,” which increased the number of plan participants⁵ and thus the number of plans with 100 participants or more.

Contributions to Retirement Plans
As Figure 2 shows, contributions to retirement plans increased steadily from 1975 to 2005, driven primarily by DC plans. Between 2000 and 2005, contributions to DC plans increased 25 percent, from $156,739 million to $196,560 million.

Contributions to DB plans have fluctuated, rising from $31,039 million in 2000 to $114,375 million in 2003 and then dropping to $87,531 million by 2005. The rise and fall occurred primarily because the funding laws prior to the Pension Protection Act of 2006 (PPA) prevented plan sponsors from overfunding their DB plans (at least those that wanted to) when the market was up. During the bear market of 2000 to 2003, asset levels dropped, which drove funding levels down and forced plan sponsors to make large contributions to their DB plans. During the 2003-2005 bull market, however, assets recovered lost ground and contributions decreased accordingly.

Benefit Disbursements From Retirement Plans
Figure 3 shows the increase in benefit disbursements from retirement plans with 100 or more participants from 1975 to 2005. The increase was primarily due to the steady rise in benefit payouts from DB plans; payouts from DC plans were much more erratic. The different disbursement patterns in DB and DC plans result from several factors. According to information found in Watson Wyatt’s COMPARISON™ database, a majority of benefit payouts from DB plans are annuities, which are typically based on the participant’s age, service and/or salary, so the value of the disbursement is more fixed. Also, employees who leave their companies are often not allowed to withdraw benefits without meeting the age and service requirements for early retirement benefits, although there has been an increase in lump sum distributions over the past decade.

DC plans, however, allow participants to take their vested benefits with them when they leave. Also, DC plan participants generally manage their own assets and are more reactive to stock market fluctuations. During the 2000-to-2003 bear market, benefit payouts from DC plans decreased by 21 percent — from $165,493 million to $130,313 million. Over the same period, benefit disbursement from DB plans increased by nearly 8 percent — from $120,556 million to $129,751 million.

During the 2004-2005 economic boom, benefit disbursements from DC plans swelled to $176,379 million (a 35 percent gain). During the same period, benefit payouts from DB plans increased by only 2 percent — from $129,751 million to $132,374 million.

Assets in Retirement Plans
As Figure 4 shows, assets in all retirement plans with 100 or more participants gained value from 1975 to 2005. There were fluctuations, however, mostly due to the bear and bull markets. From 1999 to 2002 — when the market switched from bull to bear — total asset values dropped by 17.5 percent. DC plan assets fell 16 percent — from $1,893,097 million to $1,593,490 million, and DB plan assets fell 19 percent — from $2,025,843 million to $1,638,080 million. From 2003 to 2005, both DB and DC plan assets gained value. DC plan assets increased 45 percent to $2,313,162 million, and DB plan assets increased almost 36 percent to $2,222,087 million.

Conclusions
Our analysis finds that, on average, benefit disbursements per participant were higher from DB plans than from DC plans. The total number of participants in retirement plans continued to increase in 2005, as it has since 1975. During the last 10 years or so, this increase has been driven by the growing popularity of DC plans. The number of total participants in DB plans grew somewhat, while the number of participants in DC plans has gained in relative importance.

These trends pose many questions. Given that many DC plan participants neither save enough nor invest wisely enough, will they have an adequate retirement income? How much risk are DC plan participants willing to accept and how does their risk-tolerance affect their investment choices? How will fluctuations in the financial markets affect employees’ short-term and long-term goals? How will employees’ investment behavior affect their later retirement patterns — thereby affecting workforce management for their employers?

Over the 30-year period, total retirement plan contributions were highest in 2005. DC plan contributions increased during 2005, while DB plan contributions declined. The PPA has given DB plan sponsors more flexibility in terms of plan contributions, but some sponsors have already moved away from DB plans. Shifting from a DB plan to a DC plan might avoid some costs in the short term. But the shift could be less than optimal for participants — and plan sponsors — over the long term, and various investment strategies and plan designs can help sponsors mitigate pension risk.

In 2005, benefit disbursements reached an all-time high — $308,753 million. Benefit disbursements from DB plans have increased steadily from 1975 to 2005, while benefit disbursements from DC plans have been more erratic. The fluctuations in DC plan disbursements are partly explained by fluctuations in the financial markets, suggesting that employers need to become more involved in making sure that workers are adequately diversified in their investments and that they are saving enough.

A similar concern emerges about assets in retirement plans. In 2005, assets were also at an all-time high — $4,535,249 million. Assets in both DB and DC plans dipped between 1999 and 2003 and then resumed an upward trend. Again, current trends suggest that more assets will be concentrated in plans whose benefit payouts are more directly affected by financial market fluctuations. Thus, it is important for employers to provide appropriate financial information to help employees select the investment strategies and savings targets that will enable them to retire when – and in the manner – they wish.

¹ Warshawsky, Mark J. “The New Pension Law and Defined Benefit Plans: A Surprisingly Good Match,” Journal of Pension Benefits, Spring 2007, pp. 14 – 27.
² Trend and 2005 data are from the U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan Bulletin (February 2008).
³ It is important to note that Form 5500 does not indicate whether employees participate in both a DB and a DC plan sponsored by the same employer or participate in one or the other. This ambiguity creates some double-counting of participants.
⁴ Total participants include active, retired, and separated and vested participants not yet in pay status.
⁵ The definitions of total and active participant changed. In earlier years, these definitions excluded estimates of the number of 401(k) plan participants who did not elect to receive employer contributions and nonvested, separated employees who had not yet incurred the break-in-service. However, these definitions relied on information provided by Schedule T of Form 5500, which is no longer required. Starting in 2005, total and active participant counts are reported as they appear on Form 5500.

May 2008