Study: Worker Mobility Increases Also Driving DB Declines

May 12, 2005 (PLANSPONSOR.com) - The continuing drop in the number of employers offering defined benefit pension plans may not be entirely driven by their desire to cut benefit costs and ease regulatory burdens, a new study suggests.

In fact, a Federal Reserve Board study asserted that cost issues and difficulties in coping with defined benefit regulatory complexities are only part of the forces behind a drop in the share of DB-covered workers from 35% in 1979 to 14% in 1998 and a jump in defined contribution plan coverage from 19% to nearly 34% during the same period.

Federal Reserve economist Stephanie Aaronson and Julia Coronado, a Watson Wyatt Worldwide economist, claim that forces such as increased job mobility among American workers also come into play. Aaronson and Coronado were authors of the study “Are Firms or Workers Behind the Shift Away from DB Pension Plans?”

“We find that while there is clearly a general move away from DB plans owing to the factors such as regulatory burden or increased (worker) life expectancy that affect all firms, it is also the case that industries with a shift in demographic and firm characteristics that tend to favor more flexible employment contracts experienced a significantly larger increase in DC pension coverage and decline in DB pension coverage,” the authors wrote.

Rise of Female Employees

Aaronson and Coronado said that the 16% rise in the number of women in the workforce between 1979 and 1998 also came into play because women with child care responsibilities tend to have shorter job tenure than others.

“It appears that the decline in DB coverage has been associated with shorter employment relationships: industries that experienced a rise in the proportion of workers with less than five years of tenure experienced significantly larger declines in DB pension coverage,” the economists wrote. “Conversely, a rise in low-tenure workers is correlated with an increase in DC coverage.”

The increase in the number of dual-earning households was also a factor, the researchers contended. “One group likely to prefer such portability (of a DC plan) is dual-earner couples, who may make joint decisions about their employment,” the study said. “…It appears that an increase in the share of dual earners in an industry is significantly associated with reduced DB coverage and increased DC coverage.”

Advances in production technology also appear to be playing a part in the DB to DC migration – to some degree because a more technologically advanced and automated production system doesn’t require a specific workforce to make it run (which increases employee mobility), the researchers said. Meanwhile, according to the study data, industries showing more hiring of professional and technical workers saw statistically significant DB coverage declines and corresponding DC increases.

Falling union membership was blamed for about 5% of the decline in defined benefit plans and the rise in the size of the white collar workforce was seen subtracting nearly 6% from traditional pension plans, the report said.

With the potential for forces leading to a more mobile workforce likely to continue, the authors recommended more attention be paid to DC issues such as giving workers more access to K plans and more investment choices during their working years. They also recommended that policymakers look for ways to help workers gain more help managing lump-sum distributions of benefits on retirement.

The study is available here .

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