Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers Page: 2 of 65
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SGAO
Accountability. Integrity. Reliability
IHighlights
Highlights of GAO-08-8, a report to the
Chairman, Committee on Education and
Labor, House of Representatives
Why GAO Did This Study
Over the last 25 years, pension
coverage has shifted primarily from
"traditional" defined benefit (DB)
plans, in which workers accrue
benefits based on years of service
and earnings, toward defined
contribution (DC) plans, in which
participants accumulate retirement
balances in individual accounts.
DC plans provide greater
portability of benefits, but shift the
responsibility of saving for
retirement from employers to
employees. This report addresses
the following issues: (1) What
percentage of workers participate
in DC plans, and how much have
they saved in them? (2) How much
are workers likely to have saved in
DC plans over their careers and to
what degree do key individual
decisions and plan features affect
plan saving? (3) What options have
been recently proposed to increase
DC plan coverage, participation,
and savings? GAO analyzed data
from the Federal Reserve Board's
2004 Survey of Consumer Finances
(SCF), the latest available, utilized
a computer simulation model to
project DC plan balances at
retirement, reviewed academic
studies, and interviewed experts.
GAO is not making any
recommendations.To view the full product, including the scope
and methodology, click on GAO-08-8.
For more information, contact Barbara
Bovbjerg at (202) 512-7215 or
bovbjergb@gao.gov.PRIVATE PENSIONS
Low Defined Contribution Plan Savings May Pose
Challenges to Retirement Security, Especially for
Low-Income WorkersWhat GAO Found
GAO's analysis of 2004 SCF data found that only 36 percent of workers
participated in a current DC plan. For all workers with a current or former DC
plan, including rolled-over retirement funds, the total median account balance
was $22,800. Among workers aged 55 to 64, the median account balance were
$50,000, and those aged 60 to 64 had $60,600 (see figure below). Low-income
workers had less opportunity to participate in DC plans than the average
worker, and when offered an opportunity to participate in a plan, they were
less likely to do so. Modest balances might be expected, given the relatively
recent prominence of 401(k) plans.
Projections of DC plan savings over a career for workers born in 1990 indicate
that DC plans could on average replace about 22 percent of annualized career
earnings at retirement for all workers, but projected "replacement rates" vary
widely across income groups and with changes in assumptions. Projections
show almost 37 percent of workers reaching retirement with zero plan
savings. Projections also show that workers in the lowest income quartile
have projected replacement rates of 10.3 percent on average, with 63 percent
of these workers having no plan savings at retirement, while highest-income
workers have average replacement rates of 34 percent. Assuming that workers
offered a plan always participate raises projected overall savings and reduces
the number of workers with zero savings substantially, particularly among
lower-income workers.
Recent regulatory and legislative changes and proposals could have positive
effects on DC plan coverage, participation, and savings, some by facilitating
the adoption of automatic enrollment and escalation features. Some options
focus on encouraging plan sponsorship, while others would create accounts
for people not covered by an employer plan. Our findings indicate that DC
plans can provide a meaningful contribution to retirement security for some
workers but may not ensure the retirement security of lower-income workers.
Total DC Balances for Workers with a Current or Former DC Plan, Including Rolled-Over
Retirement Funds, by Age Group, 2004 SCF
Total DC balances including rollovers in thousands of dollars
140 126.3 135.3
120
100
80 64.1 60.6
40 34.9 31.643.2
20 11.9 14.6
6.2
0118-29 30-39
Age group
J Mean
Source: GAO analysis of 2004 Survey of Consumer Finances.40-49
50-59
60-64
[II Median
,United States Government Accountability Office
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United States. Government Accountability Office. Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers, report, November 29, 2007; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc296158/m1/2/: accessed April 16, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.