Employee Value, Employer Offering Are Linked

When asked the primary reason why they save, younger and lower-income households typically said they save to fund education, purchase a house, fund other purchases, or have emergency cash on hand, and are less likely to cite retirement as the primary reason. In contrast, older and higher-earning households are more likely to save primarily for retirement. Consistent with these savings preferences, groups of workers who are more focused on saving for retirement are also much more likely to work for an employer that offers a plan.

ICI found among all private-sector wage and salary workers ages 21 to 64, 53% work for an employer that sponsors a retirement plan. Among full-time, full-year workers ages 30 to 64, 62% work for an employer that sponsors a retirement plan. If the analysis is narrowed further to those groups of workers most likely to be focused on saving for retirement—workers ages 30 and older with at least moderate levels of earnings, and all but the lowest-earning workers ages 45 and older—then 70% work for an employer that sponsors a plan, and 75% have access to a retirement plan through either their own employer or their spouse’s employer. The 93% participation rate among those within this group with access to a retirement plan further demonstrates their strong interest in retirement savings, ICI says.

The study also found, although only 17% of workers at firms with fewer than 10 employees work for an employer that sponsors a plan—compared with 71% of workers at firms with 1,000 employees or more—if a firm sponsors a plan, approximately eight in 10 employees participate, regardless of firm size.

ICI explains that workers search for jobs that offer them the most valuable compensation packages. Individuals who wish to save for retirement value pension benefits because the benefits offer favorable tax treatment and other advantages such as the pooling of investments. However, because of the restrictions and tax penalties placed on accessing retirement benefits prior to retirement, some individuals who are not focused on saving for retirement would prefer cash-only compensation to an otherwise equivalent compensation package that includes both cash and pension benefits.

On the other hand, an employer is more likely to offer retirement benefits as part of the compensation package if its workforce values such benefits. ICI contends it is reasonable to predict that the likelihood of a firm offering retirement benefits is greater if a higher proportion of its workforce has the ability to save and is focused on saving for retirement.

More formally, a firm sponsors a retirement plan if the associated reduction in the firm’s direct compensation costs (cash compensation plus retirement benefits) is sufficient to cover the costs incurred by the firm to set up and administer the plan. A firm would not offer retirement benefits if doing so would increase its total compensation costs. Total compensation costs would increase if the costs incurred by the firm to set up and administer a retirement plan were greater than the associated reduction in the firm’s direct compensation costs (cash compensation plus retirement benefits that accrue to employees). ICI explains this would be the case if a firm’s employees valued retirement benefits no more highly than cash compensation. This would also be the case if a firm’s employees did value retirement benefits more highly than cash compensation, but the costs the firm would incur to set up and administer a plan would be greater than any associated reduction in direct compensation costs.

“It’s well known that about half of America’s workers are covered by an employer-sponsored retirement plan, but less is known about who is in that half, and why,” says Peter Brady, ICI senior economist and a coauthor of the study. “Policy discussions surrounding retirement often focus on this statistic, but the percentage of the workforce with a retirement plan today is an underestimate of the percentage of workers who will reach retirement having accrued employer-provided retirement benefits. Many more workers will have access to a plan at some point in their career than is indicated by taking a snapshot of coverage at any single point in time.”

According to ICI, the study provides a comprehensive analysis of the private pension system to provide facts for policymakers, employers, and the financial services industry to consider as they work to increase retirement plan coverage.

The study report, “Who Gets Retirement Plans and Why, 2013,” is here.