Defined contribution plans – such as the 401(k) – are far more common than defined benefit retirement plans within the private sector, but a new report shows the former may be more costly for employers.
The report by the U.S. Bureau of Labor Statistics (BLS) estimates that private employer costs for defined contribution plans were nearly 40 percent higher than private employer costs for defined benefit plans last year.
The data, detailed in the Dec. 26, 2012 report, were based on the results of the March 2012 National Compensation Survey conducted by the BLS.
In March 2012, employers that utilize defined contribution plans averaged costs of 60 cents per employee hour worked. In comparison, employers that used defined benefit plans averaged costs of 43 cents per employee hour worked.
On the flip side, the average costs for private sector employees participating in defined benefit plans were 70 percent higher than the average costs for those participating in defined contribution plans.
For the period examined by the BLS, 41 percent of private industry workers participated in a defined contribution plan, compared with 17 percent of private industry workers who participated in a defined benefit plan.
Defined contribution plans specify the level of an employer’s contributions to an employee’s retirement plan, with any contributions placed into the employee’s retirement portfolio, while defined benefit plans provide employees with guaranteed retirement benefits based on a formula.
The BLS report notes that the shift among private sector employers toward defined contribution plans began in the 1980s as a means of cuttings costs and adding flexibility.
However, the report states, “private industry employers now spend more per employee hour worked for defined contribution plans than for defined benefit plans.”
Larger companies paid more for both types of plans.
For businesses with fewer than 100 employees, defined benefit costs averaged 23 cents per employee hour worked and defined contribution costs averaged 39 cents per employee hour worked.
Those costs increased to 42 cents and 65 cents, respectively, for companies with 100 to 499 workers.
Companies with more than 500 workers saw defined benefit plan costs averaging 99 cents per employee hour worked and defined contribution plan costs averaging $1.10 per employee hour worked.
Private employers in the natural resources, construction and maintenance fields encountered the highest retirement plan costs.
For companies in that category, defined benefit plans averaged $1.10 per employee hour worked, while defined contribution plans averaged 56 cents per employee hour worked.
Retirement plans were cheapest for the services sector, according to the report.
Service-based companies incurred average costs of 9 cents per employee hour worked for defined benefit plans and 13 cents per employee hour worked for defined contribution plans.