Increasing Role of DC Plans in Public Sector Retirement

For the week of December 10th  from the Nation Institute on Retirement Security:

While the defined benefit (DB) pension plan remains the predominant form of retirement vehicle in the public sector, more and more public sector workers are also relying on defined contribution (DC) plans for their overall retirement security. But the DC landscape for public employees can be complicated and fragmented, with nearly one in five workers participating in multiple DC plans, with some holding assets in as many as seven different DC plans. Also, half of DC plan participants approaching retirement age have account balances less than $40,000 as of year-end 2021, according to the Public Retirement Research Lab (PRRL)’s latest edition of the “State of Public-Sector DC Plans.” Understanding participant behavior in public-sector DC plans is therefore “critical to ensuring retirement security for participants,” according to the PRRL.

[The PRRL is a retirement-industry-sponsored collaborative effort of the Employee Benefit Research Institute (EBRI) and the National Association of Government Defined Contribution Administrators (NAGDCA). The PRRL analyzes data from its Public Retirement Research Database, the first database specific to public-sector defined contribution data, to produce research aimed at enhancing understanding of the design and utilization of public-sector defined contribution retirement plans. Its objective is to better inform public plan design, management, innovation, and legislation. This is the second edition of the report and the analysis reflects data for 267 plans across 457(b), 401(a), 401(k), and 403(b) DC plans; over 2.5 million state, county, city, and subdivision government employees; and $170 billion in assets as of year-end 2021.]

The most common plan in the PRRL Database – as measured by both number of participants and plan assets — is the 457(b) plan, representing 63 percent of database participants and 66 percent of assets. The least common plan type is the 403(b) plan, with one percent of participants and two percent of assets. (Since a large percentage of public DC assets are held in 403(b) plans, as the brief notes, it is well to keep in mind that the database numbers therefore would not appear to necessarily reflect actual levels of public sector participation.)

While 401(a) plans represent 20 percent of the total participants in the database, they represent just 15 percent of the total assets, compared to legacy non-ERISA 401(k) plans (established prior to 1986) which comprise 15 percent of the database, but represent 17 percent of assets.

Finally, the age distribution of public-sector employees covered in the database by plan type shows that 401(a) plans are becoming “increasingly common in newer pension tiers,” as the PRRL describes it. Not surprisingly, these therefore “show a skewed distribution toward younger workers,” while plan types “more  historically used in the public sector (e.g., 457(b), 403(b), and 401(k))” all skew in the opposite direction, with the most frequent use being among the 50s age cohort, the PRRL brief notes.

Keeping these parameters in mind, the PRRL brief analyzes public-sector plan participants’ savings behaviors, looking at balances, contributions, and asset allocation by participants’ age and tenure. Some of the key findings include the following [NB: “Median” is the middle number if all numbers were listed in order from ascending to descending; the “mean” number is the overall average of all numbers]:

Account Balances. The average account balances for participants in each plan type are shown by four groupings of tenure: 1) less than three years; 2) between three and seven years (inclusive); 3) greater than seven and less than or equal to 17 years; and 4) greater than 17 years.

• Half of public plan participants in their 60s have account balances lower than $40,000.
• The median account balance for public plan participants in their 40’s is approximately $18,000, whereas the mean account balance for the employees the same age is $57,000.

Contributions. The brief presents mean and median employee contributions by age, as well as mean and median total contribution rates by age.

• The mean employee contribution for public plan participants in their 20s was roughly $1,600 per year, or approximately $130 per month.
• The mean employee contribution rate (employee contributions divided by salary) for participants in their 20s was 2.7 percent. This rate increases with age, reaching 9.5 percent for participants in their 60s.

Loan Usage. The average amount of the outstanding loan balances exhibits an increasing pattern up to traditional retirement age. The average loan amount as a percentage of account balance is higher for younger participants (reflecting their lower account balances) but decreases as age increases.

• The percentage of participants who take loans from their plans by age goes from 1.7 percent of participants in their 20s to a maximum of 9.6 percent of participants in their 40s, and decreases to 5.2 percent of participants in their 60s.
• For participants in their 40s, the mean size of the outstanding loan was approximately $9,500.

Asset Allocations. The PRRL Database categorizes each investment option into one of 26 separate categories, including, for example, investment options focused on domestic, publicly traded small companies (e.g., “small caps”), or other investment options such as real estate investment trusts (REITs), or funds invested strictly in inflation-protected treasury bonds issued by the federal government. The categories are aggregated into six core asset classes: equities, bonds, money market or stable value, target-date funds, balanced funds (e.g., mutual funds with a fixed allocation to equities and bonds that does not change over time), and “other” investments, which refers to in-plan annuities, REITs, and investments that cannot be classified. (It is well to note the relatively large proportion of “other” investments reflects a measure of investment data “unavailability,” PRRL points out.)

• Participants in their 20s have the largest allocations to target-date funds (approximately 50 percent).
• Allocations to bond funds and money market/stable-value funds increase with age, reaching seven percent and 20 percent respectively for participants in their 60s.

NCTR believes public sector employees’ supplemental savings is an increasingly important area for attention. For example, the National Institute on Retirement Security (NIRS) estimates that employees in the average public sector DB plan still need to save from four to six percent on their own for an adequate retirement.  Also, as the PRRL brief observes, DB reform can often involve reducing benefits to newly hired workers. Therefore, given that DC retirement plans “play an increasingly larger role for individuals entering public-sector employment, understanding participant behavior in public-sector DC plans is critical to ensuring retirement security for participants,” their new brief underscores.