10 Compensation and Working Conditions Winter 1998

ANN C. FOSTER

Factors Affecting

Employer-provided

Retirement Benefits

A variety of factors affect the benefits that covered

workers receive from employer-provided retirement

plans. For defined benefit plan participants, these factors

include the benefit formula, retirement age, length of

service, and pre-retirement earnings. For defined contribution plan participants, they include contribution

amounts and investment earnings.

Ann C. Foster is an economist in the

Division of Compensation Data Analysis

and Planning, Bureau of Labor Statistics.

Telephone (202) 606-6222

E-mail: Foster_A@bls.gov

Employer-provided retirement

benefits can enhance economic

security in retirement. In 1994,

91 percent of aged units1 with at least

one member over 65 years of age received Social Security benefits, and 30

percent received income from private

pensions. Among all recipients, however, private pensions, on average, accounted for one-fourth of total income.

In the same year, median total income

only from Social Security was $10,817

for aged units 65 or older, compared

to $21,375 for those with income from

both Social Security and a private pension.

Employer-provided retirement

benefits may become more important

to the economic security of future retirees. Many proposals for assuring

the long-term viability of the current

Social Security system depend on a

healthy private pension system as well

as on workers saving more for retirement.2

This article examines recent changes

in retirement plan coverage and the factors affecting the payments workers

receive from defined benefit and defined contribution retirement plans.3

Retirement plan coverage

Overall retirement plan coverage has

remained relatively stable in recent

years. There has been a shift, however, in the types of plans providing

coverage to workers.

In the mid-1980s, private sector

employers increasingly added 401(k)

tax deferred provisions to their defined

contribution plans or established new

plans with 401(k) provisions. This has

resulted in a shift in coverage from

defined benefit pension plans and non401(k) defined contribution plans to

401(k) plans.4

Bureau of Labor Statistics data from

the Employee Benefits Survey show

that in 1994-95, 66 percent of all fulltime employees participated in one or

more retirement plans, the same proportion as in 1990-91.5 In 1994-95,

96 percent of State and local government workers had retirement plan coverage compared to 80 percent of workers in medium and large private
 Compensation and Working Conditions Winter 1998 11

Factors Affecting Retirement

participated in one or more defined

contribution plans with employer contributions, up from 34 percent in 1990-

91. Increased participation in these

plans also occurred exclusively in the

private sector. In 1994-95, 55 percent

of employees in medium and large private establishments and 34 percent in

small private establishments participated in such plans compared to 48

and 31 percent, respectively, in 1990-

91. Coverage among public employees was the same (9 percent) during

both periods.

Savings and thrift plans are the

most prevalent form of defined contribution plan, with 24 percent of all

full-time employees participating in

1994-95. In these plans, participants

contribute a predetermined portion of

earnings, all or part of which the employer matches.8 Participation among

employees in medium and large private establishments was 41 percent,

and participation among small private

establishment employees was 17 percent. These proportions were much

higher than the participation rates of

29 and 10 percent, respectively, in

1990-91. Among State and local government workers, participation was

negligible in both periods.

Deferred profit-sharing and employee stock ownership plans (ESOPs)

are only found in the private sector.

In 1994-95, 13 percent of full-time

employees in both medium and large

and small private establishments participated in deferred profit-sharing

plans compared to 16 and 15 percent,

respectively, in 1990-91. Deferred

profit-sharing plans differ from savings and thrift plans in that they are

usually financed by employer contributions only.9

Employee stock ownership plans

are usually financed entirely by the

employer and must be designed to invest funds primarily in company stock.

They may also be the means by which

employees purchase their company.10

In 1994-95, 5 percent of employees in

medium and large private establishments participated in an ESOP compared to 3 percent in 1990-91; about 1

percent of employees in small private

establishments participated during

both periods.

In 1994-95, 6 percent of all fulltime employees participated in a

money purchase pension plan. This

type of plan is generally funded only

by employer contributions, (most often a percentage of an employee’s

earnings). However, when employee

contributions are made, they are usually made on a pretax basis. Participation ranged from 5 percent of small

private establishment employees to 7

percent of employees in both medium

and large private establishments and

State and local governments, not much

different from the proportions found

in 1990-91.11

401(k) type plans. All defined contribution plans, except ESOPs, may

have 401(k) type features (cash or deferred arrangements). Although

401(k) plans are commonly found in

the private sector, cash or deferred arrangements also include section 457

and 403(b) plans for State and local

government employees.12

Cash or deferred arrangements allow participants to choose to either

TABLE 1. Percent of full-time employees participating in retirement plans by establishment type,

1990-91 and 1994-95

Retirement plan All

Medium

and large

private

establishments

Small

private

establishments

State and

local

governments

1990-91

All retirement1 ............................... 66 78 42 96

Defined benefit ........................... 48 59 20 90

Defined contribution2 .................. 34 48 31 9

Savings and thrift .................... 16 29 10 1

Deferred profit sharing ............ 13 16 15 -

Employee stock ownership ..... 1 3 1 -

Money purchase pension ....... 7 7 6 8

1994-95

All retirement1 ............................... 66 80 42 96

Defined benefit ........................... 42 52 15 91

Defined contribution2 .................. 39 55 34 9

Savings and thrift .................... 24 41 17 2

Deferred profit sharing ............ 11 13 13 -

Employee stock ownership ..... 3 5 1 -

Money purchase pension ....... 6 7 5 7

1 Includes defined benefit pension plans and defined

contribution retirement plans. The total is less than the sum

of the individual items because some employees

participated in both types of plans.

2 The total is less than the sum of the individual items

because some employees participated in more than one

type of plan.

establishments (those with 100 or

more workers) and 42 percent of workers in small private establishments

(those with fewer than 100 workers).6

These proportions are virtually identical to those found in 1990-91.7 (See

table 1.)

Defined benefit pension plans. In

1994-95, 42 percent of all full-time

employees participated in a defined

benefit pension plan, down from 48

percent in 1990-91. The shift away

from defined benefit pension plans

occurred because of a decline in these

types of plans in the private sector. In

1994-95, 52 percent of full-time employees in medium and large private

establishments and 15 percent of fulltime employees in small private establishments participated in a defined

benefit pension plan, down from 59

and 20 percent, respectively, in 1990-

91. Coverage among public employees was about the same during both

periods.

Defined contribution plans. In 1994-

95, 39 percent of full-time employees
12 Compensation and Working Conditions Winter 1998

receive currently taxable income or to

defer taxation by placing pretax income in a retirement account. If an

employee chooses to participate in a

401(k) plan (that is, voluntarily elects

a salary reduction arrangement), income taxes on the employee’s contributions and earnings are deferred until the employee begins plan

withdrawals. In 1994-95, 35 percent

of all employees were in plans with

401(k) type arrangements. Participation was highest (53 percent) among

employees in medium and large private establishments. Participation

among small business and State and

local government employees was 23

and 19 percent, respectively.13

In 1994-95, most employees (78

percent) with 401(k) type arrangements were in plans with employer

contributions. Of State and local government employees, 11 percent were

in such plans compared to 83 percent

of those in medium and large private

establishments and 88 percent of those

in small private establishments.

Although there were variations in

the type of 401(k) arrangements, the

most prevalent were savings and thrift

plans with salary reduction arrangements.14

Factors affecting payments from

defined benefit pension plans

A variety of factors affect the benefit

that a covered worker receives upon

retirement. For participants in defined

benefit pension plans, these factors

include the benefit formula used to

determine payments, retirement age,

length of service, and pre-retirement

earnings. Benefits may also be affected if the participant is in a plan

providing for post-retirement increases.15

Benefit formulas. Terminal earningsbased formulas are the most prevalent

method used to determine retirement

benefit payments. In 1994-95, virtually all full-time public employees (99

percent) and the majority of employees in medium and large private establishments (58 percent) participating in a defined benefit pension plan

were subject to terminal earningsbased formulas.16

These plans compute benefits as a

percent of terminal earnings multiplied by years of service. For the majority of public sector participants (61

percent), terminal earnings are the

average over a 3-year period. For most

private sector participants (78 percent), terminal earnings are the average over a 5-year period.17

Seventy-eight percent of public sector participants and 37 percent of private sector participants in plans with

a terminal earnings formula have a

pension benefit formula based on a flat

percent or factor.18 The average factor is 1.85 percent in public plans and

1.45 percent in private plans. If terminal earnings of $50,000 are assumed, a public employee with 30

years’ service would receive an annual

retirement benefit of $27,750 ($50,000

x .0185 x 30); an employee in the private sector with 30 years’ service

would receive a benefit of $21,750

($50,000 x .0145 x 30), or 78 percent

of that received by the public sector

employee.

As the following tabulation indicates, in 1994-95, 23 percent of private sector participants were subject

to a dollar amount formula.

 Total defined benefit plan

 participants ................... 100

Formula type

 Terminal earnings .............. 58

 Dollar amount .................... 23

 Career earnings................. 11

 Cash account .................... 3

 Percent of contribution ....... 2

 Other (unspecified) ............ 2

NOTE: Due to rounding, total does not

equal 100.

The majority of these participants

(94 percent) were in plans providing

a flat dollar amount, averaging $28.47

per month, for each year of service;

the rest (6 percent) were in plans where

the dollar amount varied by length of

service.19

Using the average flat dollar

amount, for example, an employee

with 30 years service would receive an

annual benefit of $10,249.20 ($28.47

x 30 x 12). This type of formula provides the same benefit to all workers

at equal levels of service regardless of

earnings histories. This results in a

decrease in the replacement rate (the

proportion of a retiree’s earnings during his or her final year of work that

is “replaced” by the pension benefits

received) as earnings increase.

Eleven percent of private sector

participants were in plans with benefit formulas based on career earnings.

Three percent were in plans subject to

a cash account pension formula, which

specifies an employer contribution and

a rate of interest on that contribution.

Benefits are computed as a percent of

each employee’s account balance. Two

percent of private sector participants

were in plans subject to a percent of

contribution formula, which specifies

an employer, and, occasionally, an

employee contribution. Benefits equal

a percent of total contributions. For

example, if the formula specifies 1

percent of total contributions per

month and career contributions were

$40,000, an employee would receive

a monthly benefit of $400 ($4,800 per

year).20

Normal retirement. The age at which

an employee retires affects the amount

of benefits received. Although 65 is

often thought of as the “usual” retirement age, many workers participate in

plans that permit retirement before age

65 with a normal (unreduced) pension.

In 1994-95, nearly two-thirds of fulltime public sector participants could

retire at age 55 or earlier, after meeting years of service requirements, and

still receive a normal pension; this

compares with one-tenth of participants in the private sector. (See table

2.)

Among public sector participants,

43 percent could retire at any age after satisfying a service requirement,

usually 30 years (much higher than the

6 percent for participants in the private sector). Another 21 percent could

retire at age 55, most commonly after

satisfying a 30-year service requirement (compared to 4 percent in the

Private sector benefit

formulas Percent
 Compensation and Working Conditions Winter 1998 13

Factors Affecting Retirement

Requirement

Medium and

large private

establishments

State and

local

governments

Total with normal

retirement provision ...... 100 100

Younger than age 55 ............ - 1

No service requirement .... -

 Service requirement

5 years .......................... -

20 years ........................ -

25 years ........................ -

30 years ........................ -

Age 55 .................................. 4 21

No service requirement .... 1

 Service requirement

5 years .......................... 2

10 years ........................ -

20 years ........................

21-24 years ...................

25 years ........................ 5

30 years ........................ 3 11

More than 30 years ....... 1

Age 56-59 .............................

 Service requirement

20 years ........................ -

25 years ........................ -

30 years ........................ -

Age 60 .................................. 8 5

No service requirement .... 1 2

 Service requirement

5 years .......................... 1 2

6-9 years ....................... -

10 years ........................ 3 1

15 years ........................ -

20 years ........................ -

25 years ........................ 1

30 years ........................ 2

More than 30 years ....... -

Age 61 .................................. -

Requirement

Medium and

large private

establishments

State and

local

governments

 Service requirement

15 years ........................ -

Age 62 .................................. 26 6

No service requirement .... 3

 Service requirement

5 years .......................... 4

10 years ........................ 9 5

15 years ........................ 3

20 years ........................ 4 -

21-24 years ................... -

25 years ........................ 1

26-29 years ................... -

30 years ........................ 2

More than 30 years ....... -

Age 63-64 ............................. 3

No service requirement .... -

 Service requirement

5 years .......................... - 3

Age 65 .................................. 48 8

No service requirement .... 36 2

 Service requirement

1-4 years .......................

5 years .......................... 9 3

6-9 years .......................

10 years ........................ 2 3

20 years ........................ -

25 years ........................ -

Service requirement only .. 6 43

Less than 30 years ....... - 7

30 years ........................ 5 29

More than 30 years ....... 8

Sum of age plus service ....... 9 12

Less than 80 ................. 1

80 .................................. 1 4

81-89 ............................ 6 1

90 .................................. 1 4

More than 90 ................ 2

1

 Less than 0.5 percent.

NOTE: Because of rounding, sums of individual items may not

equal totals. Dash indicates no employees in this category.

Table 2. Age and service requirements for normal retirement, full-time employees by selected establishment type, 1994-95

(In percent)

private sector). In contrast, 48 percent of full-time private sector participants had a minimum age of 65 for

normal retirement (with varying years

of service requirements) compared to

8 percent of public sector participants.

Early retirement. Most workers participating in defined benefit pension

plans can retire before the normal retirement age and receive a reduced

pension. In 1994-95, 96 percent of

those in medium and large private establishments and 87 percent of those

in State and local governments participated in plans with early retirement

provisions.21

Among private sector participants

with early retirement provisions, the

greatest proportion (32 percent) were

in plans allowing early retirement at

age 55 with 10 years of service. (See

table 3.) A substantial proportion,

however, were in plans allowing early

retirement at age 55 with 5 years of

service (22 percent) and age 55 with

15 years of service (10 percent).

The most common early retirement

age and service requirements for public sector participants were age 55 and

5 years of service (11 percent), age 55

and 25 years of service (10 percent),

and age 55 and 10 years of service (9

percent).

Twenty percent of public sector participants were in plans allowing early

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14 Compensation and Working Conditions Winter 1998

TABLE 3. Age and service requirements for early retirement, full-time

employees by selected establishment type, 1994-95

(in percent)

Requirement

Medium and

large private

establishments

State and

local

governments

Total with early

retirement provision ........ 100 100

Younger than age 55 .............. 10 20

No service requirement ...... 1 () -

Service requirement

5 years ............................ 3 8

6-9 years ......................... 1 ( ) 1 ( )

10 years .......................... 2 1

15 years .......................... 1 1

20 years .......................... 1 () 5

25 years .......................... 3 1

30 years .......................... - 3

Age 55 .................................... 70 46

No service requirement ...... 4 -

Service requirement

Less than 5 years ........... 1 () 3

5 years ............................ 22 11

6-9 years ......................... 1 () 1

10 years .......................... 32 9

11-14 years ..................... 1 () -

15 years .......................... 10 5

20 years .......................... 1 3

25 years .......................... 1 10

30 years .......................... - 2

Age 56-59 ............................... 1 -

No service requirement ...... - -

Service requirement

10 years .......................... 1 () -

30 years .......................... 1 -

Age 60 .................................... 7 3

No service requirement ...... 1 () -

Service requirement

5 years ............................ 2 1 ( )

10 years .......................... 1 1

15 years .......................... 2 -

20 years .......................... 1 () 2

30 years .......................... 1 -

Age 62 .................................... 1 1 ( )

No service requirement ...... - -

Service requirement

10 years .......................... 1 ( ) 1 ( )

15 years .......................... 1 -

Service requirement only ........ 8 26

Less than 30 years ......... 1 16

30 years .......................... 7 9

More than 30 years ......... - 1 ( )

Sum of age plus service ......... 4 3

Less than 80 ................... 4 3

80 .................................... 1 ( ) 1 ( )

81-89 .............................. 1 () -

1 Less than 0.5 percent.

 NOTE: Because of rounding, sums of

individual items may not equal totals. 

Dash indicates no employees in this

category.
 Compensation and Working Conditions Winter 1998 15

Factors Affecting Retirement

adds 2 percent, for a total contribution of 6 percent.

All other factors being equal, employees who make larger contributions

should receive larger benefits than

employees whose contributions are

lower. 28

Investment earnings. Most savings

and thrift plans have more than one

investment option. Participants can

usually direct their own contributions

and their employer’s as well. All other

factors being equal, the higher the rate

of return from the participant’s investment choice or choices, the greater the

sum available at retirement. At an

annual interest rate of 6 percent, an

employee with final year earnings of

$35,000 and 20 years of participation

in a savings and thrift plan would receive a lump sum of $79,870; accrued

interest accounts for 42 percent of the

amount received.29

Conclusion

Although Social Security is still the

main source of support for many current retirees, existing research has

found that current workers who expect

it to be their most important retirement

income source are not confident about

their lifestyle in retirement.30 Employee Benefits Survey data show that

the majority of current workers participate in one or more employer-provided retirement plans. Benefits from

these plans could greatly enhance economic security in retirement for many

of these workers.

For participants in both defined

contribution and defined benefit plans,

financial planning is needed if workers are to use these benefits to their

advantage. The trend toward increased participation in defined contribution plans means that more and

more employees bear the responsibility for determining where to invest the

funds in an employer-provided retirement plan. The greater the return from

a defined contribution plan, the greater

the amount available to a participant

upon retirement. Increased knowledge

of investing could help defined contribution plan participants obtain the

retirement before age 55 with varying

years of service requirements, compared to 10 percent of private sector

participants. Twenty-six percent of

public sector participants were in plans

with a service requirement only and

could potentially retire before age 55.

Eight percent of private sector participants were in such plans.

A worker who takes early retirement will receive benefits over a longer

time period than if benefits had begun

at the normal retirement age. That is

why, all factors being equal, such a

worker usually receives a smaller pension than one who retires at the normal retirement age. Early retirement

benefits are generally based on the

normal retirement benefit, to which a

reduction factor is applied. In many

plans, reduction factors are smaller

than those determined actuarially (i.e.,

based on life expectancy), indicating

that the employer is subsidizing the

early retirement benefit.22

Post-retirement pension increases.

Inflation can seriously erode the purchasing power of a retiree’s pension

benefit. To prevent such erosion, some

plans specify automatic cost-of-living

increases, usually based on changes in

the Consumer Price Index (CPI). In

1994-95, 54 percent of public sector

participants were in plans that provided these automatic increases compared to 3 percent of their private sector counterparts.23

Some employers provide a discretionary or ad hoc increase to adjust

retiree benefits for inflation. In 1994-

95, 13 percent of public sector participants were in plans that had granted

an ad hoc increase during the previous 5 years compared to 4 percent of

private sector participants.24

The incidence of post-retirement

pension increases was much higher in

previous years when inflation was also

much higher. For instance, in 1989-

90, 7 percent of participants in medium and large private establishments

and 50 percent of public sector participants were in plans that provided

for an automatic cost-of-living adjustment. In addition, 22 percent of participants in medium and large private

establishments and 16 percent of public sector participants were in plans

that had granted an ad hoc increase

during the previous 5 years.25

Although beneficial, these post-retirement increases may not fully protect against purchasing power loss.

Automatic increases, for example, are

often restricted to a portion of the CPI

change or by ceilings, generally 3 percent or less, that are applied to them.

Employee Benefits Survey data show

that in the 1980s, ad hoc pension increases were, on average, about onethird to one-half of the inflation rate.26

Factors affecting payments from

defined contribution plans

In defined contribution plans, an account is established for each participating employee. Generally, the employer, and often the employee as well,

make fixed (defined) contributions to

the account. Benefits are not predetermined, but depend on contributed

amounts and any investment earnings.

These factors make it much more difficult than with defined benefit pension plans to determine the benefits

that will be received.

Contributions. Defined contribution

plans differ widely in the amount of

specified employer and employee contributions that can or must be made.

Savings and thrift plans, the most

prevalent form of defined contribution

plan, usually require a basic employee

contribution that is subject to the

employer’s matching contribution.

Most plans also permit voluntary employee contributions in excess of the

maximum amount matched by the

employer. For example in 1995, the

most common matching provision was

for an employer to match half of an

employee’s contribution, up to the first

6 percent of earnings.27 If an employee

contributes 9 percent of earnings, the

employer adds 3 percent (half of the

first 6 percent of earnings), for a total

contribution of 12 percent. If, however, an employee contributes 4 percent of earnings (less than the maximum basic contribution), the employer
16 Compensation and Working Conditions Winter 1998

highest rate of return consistent with

their tolerance for risk.

Participants in defined benefit pension plans should be aware of factors,

such as normal and early retirement

provisions, benefit formulas, etc., and

how they impact the amounts received

at retirement. Such information will

indicate whether additional funds are

needed to meet retirement goals and

whether retirement lifestyle expectations should be adjusted. 

1

 Although the Social Security Administration defines aged units to include married couples

living together, with at least one member 55 or

older, and nonmarried persons 55 or older, the

author only examined income data for aged units

65 years or older. Income figures do not include

income of others not in the aged unit, but living in

the same household. For more information, see

Social Security Administration, Income of the

Population 55 and Older, 1994, Publication No.

13-11871, (Social Security Administration,

1996). 2

 For more information, see Dallas L.

Salisbury (Ed.), Assessing Social Security Reform

Alternatives (Washington, DC: Employee Benefit

Research Institute, 1997); and William J.

Wiatrowski, “Social Security in the United States

and Chile,” Compensation and Working Conditions, Fall 1998, pp. 12-17.

3

 This article is an expansion of information

in Ann C. Foster’s, “Employer-provided Retirement Benefits,” in Personal Finances and Worker

Productivity, Proceedings of the Personal Finance

Employee Education Best Practices and Collaborations Conference, November 5-6, 1997, (Vol.

1, No. 1), edited by E. Thomas Garman, John E.

Grable, and So-Hyun Joo, Blacksburg, VA: Virginia Tech, 1997, pp. 115-126. 4

 Defined benefit pension plans use predetermined formulas to calculate retirement benefits. In a defined contribution plan, an account

is set up for each participant. Generally, the employer, and often the employee as well, make

fixed (or defined) contributions to the account.

Benefits at retirement are not predetermined, but

depend on contributed amounts and any investment earnings.

 The term 401(k) refers to the section of the

Internal Revenue Code that allows employees to

choose to have a portion of their compensation

(otherwise payable in cash) invested in a qualified defined contribution plan on a tax-deferred

basis. In the Employee Benefits Survey, similar

arrangements authorized under section 403(b) of

the Internal Revenue Code are also tabulated as

401(k) plans. 5

 For more information, see Ann C. Foster,

“Employee Benefits in the United States, 1994-

95,” Compensation and Working Conditions,

Spring 1998, pp. 56-61; and BLS Reports on

Employee Benefits in the United States, 1990-

91, Summary 93-4, (Bureau of Labor Statistics,

1993). 6

 See Employee Benefits in Medium and

Large Private Establishments, 1995, Bulletin

2496, (Bureau of Labor Statistics, 1998); Employee Benefits in Small Private Establishments,

1994, Bulletin 2475, (Bureau of Labor Statistics,

1996); and Employee Benefits in State and Local Governments, 1994, Bulletin 2477, (Bureau

of Labor Statistics, 1996). 7

 See Employee Benefits in Medium and

Large Private Establishments, 1991, Bulletin

2422, (Bureau of Labor Statistics, 1993); Employee Benefits in Small Private Establishments,

1990, Bulletin 2388, (Bureau of Labor Statistics,

1991); and Employee Benefits in State and Local Governments, 1990, Bulletin 2398, (Bureau

of Labor Statistics, 1992). 8

 For more detailed information, see Ann C.

Foster, “Employee Participation in Savings and

Thrift Plans, 1993,” Monthly Labor Review,

March 1996, pp.17-22. 9

 In 1994-95, for example, 6 percent of employees in medium and large private establishments who participated in a deferred profit-sharing plan were required to contribute. In contrast,

36 percent were in plans where employee contributions were allowed, but not required. For more

information, see Employee Benefits in Medium

and Large Private Establishments, 1995; and

Ann C. Foster, “Defined Contribution Retirement

Plans Become More Prevalent,” Compensation

and Working Conditions, June 1996, pp. 42-44. 10 For more detailed information on ESOPs,

see Fundamentals of Employee Benefit Programs, Fifth Edition, (Washington, DC: Employee

Benefit Research Institute, 1997). 11 Money purchase pension plans are sometimes thought of as defined benefit pension plans

because they often, like defined benefit pension

plans, provide a fixed payment to participants at

retirement. These fixed payments, however, are

generated by using the funds accumulated in an

employee’s account to purchase an annuity that

guarantees a periodic payment for life. For more

information, see Ann C. Foster, “Defined Contribution Retirement Plans Become More Prevalent.”12 Information on section 457 and 403(b) plans

may be found in Fundamentals of Employee Benefit Programs. 13 In 1990-91, 44 percent of employees in

medium and large private establishments participated in a 401(k) type plan compared to 15 percent in small private establishments and 18 percent in State and local governments. For more

information see Employee Benefits in Medium

and Large Private Establishments, 1991; Employee Benefits in Small Private Establishments,

1990; and Employee Benefits in State and Local

Governments, 1990. 14 Some employees participating in money

purchase pension plans are required to contribute,

usually on a pretax basis. In 1994-95, 5 percent

of State and local government employees were in

money purchase pension plans where required

employee contributions are made on a pretax basis. These contributions allow an employee to

defer taxes, but are not considered salary reduction arrangements under section 401(k) of the Internal Revenue Code. Under Section 401(k) a

participant must voluntarily elect to have a contribution made to a 401(k) type plan. For more

information see Fundamentals of Employee Benefit Programs. Additional information on types

of 401(k) arrangements may be found in Ann C.

Foster, “Defined Contribution Retirement Plans

Become More Prevalent.” 15 Because of low coverage rates and high

nonresponse rates in the 1994 survey of small private establishments, information on detailed provisions of defined benefit plans was not reported.

For this reason, the analysis in this section is confined to participants in medium and large private

establishments and State and local governments.

For more information, see Employee Benefits in

Small Private Establishments, 1994. 16 Data in this section are for the primary formula used to compute benefits. Alternative formulas are sometimes available to provide a minimum benefit for employees with short service or

low earnings. For more information, see Employee Benefits in Medium and Large Private Establishments, 1995; and Employee Benefits in

State and Local Governments, 1994. 17 For more information, see Employee Benefits in Medium and Large Private Establishments, 1995; and Employee Benefits in State and

Local Governments, 1994. 18 Public sector participants in plans with a

terminal earnings formula also included 18 percent where the percent per year varied by service

and 3 percent where the percent varied by earnings; less than 0.5 percent were in plans where the

percent per year varied by age or by earnings and

service. Private sector participants in plans with a

terminal earnings formula also included 41 percent where the percent per year varied by service,

13 percent by earnings and service, and 8 percent

by service; less than 0.5 percent were in plans

where the percent per year varied by age. For more

information, see Employee Benefits in Medium

and Large Private Establishments, 1995; and

Employee Benefits in State and Local Governments, 1994. 19 For more information, see Employee Benefits in Medium and Large Private Establishments, 1995. 20 It should be noted that cash account and

percent of contribution formulas resemble those

found in defined contribution plans. The Internal

Revenue Service, however, classifies them as defined benefit plans because the employer guarantees a certain level of benefits. For more information, see Employee Benefits in Medium and Large

Private Establishments, 1995. 21 For more information, see Employee Benefits in Medium and Large Private Establishments, 1995; and Employee Benefits in State and

Local Governments, 1994. 22 For more information, see Ann C. Foster,

“Early Retirement Provisions in Defined Benefit

Pension Plans,” Compensation and Working Conditions, September 1996, pp. 12-17; and Olivia

S. Mitchell, “Trends in Pension Benefit Formulas

and Retirement Provisions,” in John A. Turner and

Daniel J. Beller, eds., Trends in Pensions 1992

(U.S. Department of Labor, Pension and Welfare

Benefits Administration, 1992), pp. 177-216. 23 For more information, see Employee Benefits in Medium and Large Private Establishments, 1995; and Employee Benefits in State and

Local Governments, 1994. 24 For more information, see Employee Benefits in State and Local Governments, 1994; and

Employee Benefits in Medium and Large Private

Establishments, 1995.
 Compensation and Working Conditions Winter 1998 17

Factors Affecting Retirement

25 For more information, see Harriet Weinstein,

“Post-retirement Pension Increases,” Compensation and Working Conditions, Fall 1997, pp. 47-

50. 26 Ibid. 27 For more information, see Employee Benefits in Medium and Large Private Establishments, 1995. 28 For more information, see Federal Retirement: Federal and Private Sector Retirement

Program Benefits Vary, GAO/GCD-97-40,

(Washington, DC: General Accounting Office,

1997). It should be noted that data from the Current Population Survey show that, in 1993, the

mean contribution rate for workers participating

in 401(k) plans was 7 percent of earnings, whereas

the median was 6 percent. These findings most

likely reflect the concentration of employer match

rate policies that stop matching when employee

contribution rates reach these levels. For more

information, see William F. Bassett, Michael J.

Fleming, and Anthony P. Rodrigues, How Workers Use 401(k) Plans: The Participation, Contribution and Withdrawal Decisions, Staff Report

Number 38 (Federal Reserve Bank of New York,

March 1998). 29 See Michael Bucci, “Lump Sum Benefits

Available from Savings and Thrift Plans,”

Monthly Labor Review, June 1993, pp. 57-60. 30 See Sharon A. DeVaney and Ya-Ping Su,

“Factors Predicting the Most Important Source of

Retirement Income,” Compensation and Working Conditions, Fall 1997, pp. 25-31.

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