Pension or 401(k)? Retirement Plan Trends in the U.S. Workplace

In several recent strikes, unions bargained for, among other things, the restoration of defined-benefit (DB) retirement plans, commonly pensions. For example, Boeing’s pension—which the company froze in 2014 in favor of a 401(k), a common type of defined-contribution (DC) retirement plan—was central to negotiations in last year’s machinists strike. The situation at Boeing was not unique; the restoration of pensions was also part of negotiations during the United Auto Workers strike in 2023. In both cases, compromises were reached to increase employer contributions under the companies’ DC plans.

What are the differences between DB and DC retirement plans? How has their prevalence in the American workplace changed over time? Why might this be? In this blog post, we’ll explore possible answers to these questions.

Defining DB and DC Retirement Plans

Employer-sponsored retirement plans fall into two main types: DB plans and DC plans. DB plans—or traditional pension plans—offer a predetermined annual payout upon retirement. These pensions are typically completely funded by the employer, and their payout is usually determined by the retiree’s age, years of service at the company and salary history. In DB pension plans, employers bear the investment risk. Thus, if the investments in the pension plan are worth less than the predetermined payout, the employer makes up the difference. Conversely, if the investments beat expectations, the employer retains the excess earnings.

In a DC plan, employees contribute funds to their respective retirement accounts, setting aside a chosen portion of their earnings each payroll cycle. In some cases, employers will match a portion of employees’ contributions. While employees generally select from a set of investment options within the plan, funds in DC accounts are invested by the employer and regulated under federal and state law. Unlike DB plans, for which the payout at retirement is explicit, the final value of a DC plan account at the time of retirement depends on the performance of financial markets.

Common types of DC plans include 401(k)s, typically for private-sector workers; 403(b)s for employees in public schools, churches and certain nonprofits; and 457(b)s for workers in state and local governments and certain tax-exempt governmental entities.

Trends in Companies’ Use of DB and DC Retirement Plans

The figure below shows the percentages of workers under DB and DC employer-sponsored retirement plans. Data are obtained through the Survey of Consumer Finances (SCF), a triennial survey of American households, and cover the period from 1989 to 2022. Over the past few decades, DC plans have become more common, while fewer firms have offered DB pensions. In 2013, these percentages leveled out at around 80% for DC plans and 20% for DB plans.

U.S. Workers under Employer-Sponsored DB and DC Retirement Plans, 1989-2022

SOURCE: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

NOTES: Workers can have both DB and DC retirement plans, explaining why values in the figure may sum to greater than 100. Questions in the SCF on types of employer-sponsored retirement plans changed in 2004, resulting in the apparent decline for DC plans and the apparent uptick for DB plans observed in that year.

The decline in DB pension plan participation over time is consistent across industries (see the next figure). Between 1992 and 2022, each industry category showed a net decrease in the percentage of workers under employer-sponsored DB plans. There is some overlap in levels of participation among industries. Public administration workers belong to pension plans at a higher rate than other workers because of the Federal Employees Retirement System, which offers both a DB plan and a DC plan to federal employees.

U.S. Workers under Employer-Sponsored DB Retirement Plans by Industry, 1992-2022

SOURCE: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

Why have DC retirement plans become the new norm for the American workforce? Besides reallocating investment risk from the employer to the employee, DC plans tend to be less expensive for companies to manage because of simpler administration. Employer contributions are a fixed expenditure each payroll cycle. Even though annual payouts to DB pension plan participants are defined, employers can’t know how long those payouts will last. In addition, government regulations enhanced tax incentives for DC plans and increased the cost of administering DB pensions.

Job Tenure amid Declines in the Prevalence of Pensions

Why did employers offer DB pensions initially? Two Federal Reserve working papers posed that, in the eyes of employers, pensions may be an incentive to keep workers at a company. Both studies analyzed data from the late 20th centuryStephanie Aaronson and Julia Coronado’s 2005 working paper, “Are Firms or Workers Behind the Shift Away from DB Pension Plans?”, used data from 1979 to 1998, and Leora Friedberg and Michael T. Owyang’s 2002 working paper, “Explaining the Evolution of Pension Structure and Job Tenure,” used data from 1983 to 2001.; more-recent data suggest this may no longer be the case. Even as DB pensions have decreased in prevalence over time, mean job tenure increased from 1989 to 2001 and remained relatively constant between 2004 and 2022 (see the following figure).

If pensions were a strong retention incentive for employees, one would expect a mirroring decline in job tenure. However, as evident from the recent Boeing and UAW strikes, pensions are still widely valued by workers.

Mean Job Tenure among U.S. Workers, 1989-2022

SOURCE: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

Note

1. Stephanie Aaronson and Julia Coronado’s 2005 working paper, “Are Firms or Workers Behind the Shift Away from DB Pension Plans?”, used data from 1979 to 1998, and Leora Friedberg and Michael T. Owyang’s 2002 working paper, “Explaining the Evolution of Pension Structure and Job Tenure,” used data from 1983 to 2001.