U.S. BUREAU OF LABOR STATISTICS COMPENSATION AND WORKING CONDITIONS

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Percent of participants in defined benefit plans by types and periods of earnings,

full-time employees, 1997-2000

by Bryandt Rose Dickerson

Bureau of Labor Statistics

Originally Posted: July 29, 2003

Percent of participants in defined benefit plans by types of earnings, full-time employees, 1997-2000

Earnings based formula 1997 2000

Type of earnings

Straight time earnings only 59 45

Straight time earnings plus other earnings 41 55

Overtime 31 42

Shift differentials 26 20

Commissions 22 31

Other 17 NA

Source: National Compensation Survey--Benefits.

Note: Data represent all full-time industry employees; 1997 data limited to establishments with 100 or more workers.

NA: Data are not available.

Percent of participants in defined benefit plans by periods of terminal earnings, 1997-2000

Number of years 1997 2000

One 1 1

3 years 17 13

5 years 78 82

Source: National Compensation Survey--Benefits.

Note: Data represent all full-time industry employees; 1997 data limited to establishments with 100 or more workers.

NA = data not available. • Defined benefit plans guarantee a periodic payment to the recipient. The most prevalent means of determining plan

benefits is through a terminal earnings formula. • Terminal earnings formulas base benefits on a percentage of average earnings during a specified number of years at

the end of the employee’s career, when earnings are expected to be the highest. Each of these variables--percentage

of earnings, definitions of earnings, and specified number of years--affects final benefit payout differently. Defined

benefit plans with terminal earnings formulas design the terms and treatment of the variables according to individual

company objectives. Changes in variable terms can alter the benefit payout to the employee. • Generally, the percentage used in the terminal earnings formulas ranges from 1 to 2 percent of specified earnings

multiplied by the number of years of service. There are minimal differences in the amounts used in private industry

and government. In 1997, the BLS National Compensation Survey (NCS) reported that the average flat percent per

year of service for all full-time employees in private industry was 1.5 percent. This is comparable to the percentage
U.S. BUREAU OF LABOR STATISTICS COMPENSATION AND WORKING CONDITIONS

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used in the federal civil service retirement system (1.5 to 2 percent). As would be expected, any increase in the

percent used in the terminal earnings formula would generate a gain in the employee benefit payout, if all other

variables remained the same. • Earnings compositions differ by company-specific defined benefit plans. Some plans define earnings as straight-time

earnings only, while others refer to earnings as social security wages, which include straight-time earnings plus other

earnings. Benefits data from the NCS show that in 2000 most of those covered by earnings-based formulas were in

plans that included both straight-time earnings and other earnings. Since 1997, when the majority of the earningsbased formulas included only straight-time earnings, there has been a trend in the NCS toward including more types

of income. Plans that included straight-time earnings and overtime accounted for 42 percent of all full-time private

industry employees with defined benefit plans with earnings-based formulas in 2000. The percent of plans with

earnings such as overtime, commissions, or shift differentials increased from 1997 to 2000. If earnings are not limited

only to straight-time earnings, the potential for the benefit payout appears to be greater if the other variables remain

constant. • The specified years of service used in the terminal earnings formulas generally vary from 1 to 5 years. Some terminal

earnings formulas use figures greater than 5 years. There are variations, such as the average of the highest earnings

in consecutive 5 years out of the last 10 years. In both 1997 and 2000, according to the NCS benefits survey, 5 years

was the most prevalent figure used in the terminal earnings formulas for all full-time private industry employees. If the

specified number of years of service increases, and all other variables remain the same, the expected benefit payout

would decrease.

Bryandt Rose Dickerson

Economist, Office of Compensation and Working Conditions, Bureau of Labor Statistics.

Telephone: (202) 691-7744; E-mail: Dickerson.Bryandt@bls.gov

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