	Background

Employer-sponsored pensions fall into two major categories: defined  benefit (DB) and defined contribution (DC) plans. Key individual decisions and behaviors that may affect retirement savings  include the following:    Employee contributions—deposits into the plan account, typically  out of current wages. Participation among lower-income workers was particularly  limited, and those who did have accounts had very low balances. Most Workers Do Not Have a Current DC Plan, and Participants Have Modest Plan Balances

The majority of workers, in all age groups, are not participating in DC  plans with their current employers. 2). For all  workers with a current or former DC plan, the median total balance was  $22,800. Among all workers aged 55 to 64 with a current  or former DC plan, the median balance according to the 2004 SCF was  $50,000, which would provide an income of about $4,400 a year, replacing  about 9 percent of income for the average worker in this group. Workers were more likely to  roll over funds when the balances are greater. Low-Income Workers Have Particularly Low DC Plan Coverage and Plan Balances

Among workers in the lowest income quartile, only 8 percent participated  in a current DC plan, a result of markedly lower access as well as lower  participation than the average worker (see fig. Baseline simulations of  projected retirement savings for a hypothetical 1990 birth cohort indicate  that DC plan savings would on average replace about 22 percent of  annualized career earnings, but provide no savings to almost 37 percent  of the working population, perhaps because of different factors —  working for employers who do not offer a plan, choosing not to  participate, or withdrawing any accumulated plan savings prior to  retirement. Projected DC Plan Balances Vary Widely by Income, with Many Workers Having No Plan Savings at Retirement

Our projections, based on a sample of workers born in 1990, show that  workers would save enough in their DC plans over their careers to  produce, when converted to a lifetime annuity at the time of retirement, an  average of $18,784 per year in 2007 dollars (see table 3). Savings and replacement rates vary widely across  income groups. Changing Retirement Decisions or Contribution Limits Would Affect Savings Primarily for Higher-Income Workers

Other changes we make in our projections related to plan features or  individual behavior affect average replacement rates overall, but with less  impact on lower-income workers’ replacement rates and on the number of  workers with zero plan savings at retirement. Finally, we model retirement savings in two scenarios in which workers  delay retirement by 1 or 3 years. Recent Changes and Proposals Could Have Positive Effects on DC Plan Coverage, Participation, and Savings

Recent regulatory and legislative changes and proposals could have  positive effects on DC plan coverage, participation, and saving. One annual study of  plan sponsors found that in 2004, 12.4 percent of 401(k) plans were  automatically enrolling participants, and this number increased to 17.5  percent of plans in 2005. Appendix I: Scope and Methodology

To analyze saving in DC plans, we examined data from the Federal  Reserve Board’s Survey of Consumer Finances (SCF). We used the latest available survey, from 2004.
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.

What 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. 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.