After the COVID-19 pandemic accelerated retirement plan closings and dampened plan creation, a new report from Morningstar reveals that only 2,090 employers cover 50% of U.S. workers with retirement plans, leaving a heavy burden on small employers. 

While long-term growth may appear to make the retirement system look stable, Morningstar analysts argued that those numbers mask underlying turnover of thousands of plans and outflows of billions of dollars.  

Morningstar’s “2023 Retirement Plan Landscape Report” stated that the U.S. defined contribution system relies on new employers to create, on average, 44,000 plans per year to compensate for the more than 377,000 plans that closed from 2012 to 2021.  

The value of assets in plans has dropped by an average of more than $400 billion each year since 2015, according to the report, as plan assets shrink in years without strong investment returns. The system depends on new contributions and strong returns. 

“The COVID-19 pandemic did not dramatically throw off this delicately balanced system, but it did provide a warning for policymakers and plan sponsors of how future economic disruptions could cause the system to stop adding plans at a fast enough rate to replace the tens of thousands that close every year,” the report stated. 

Pandemic’s Impact 

Morningstar estimated that the beginning of the pandemic caused the number of plans closing to spike, as more than 40,000 plans closed in 2020.

Overall, Morningstar found that mega plans—those with more than $500 million in assets—mitigated the pandemic’s overall impact, and by 2020, these plans added more than 15.8 million people and covered 45% of all U.S. DC plan participants.  

In comparison, small and medium plans with $100 million or fewer in assets added fewer than 1.5 million participants in the same span, with their market shrinking to 38% of U.S. participants by 2020 from 48% in 2011, according to Morningstar. 

“The U.S. system does not work nearly as well for people who are not fortunate enough to work for larger, established employers, the general sponsor profile for larger plans,” according to the report. 

From a cost perspective, the larger the plan, the less expensive it is likely to be for participants to invest in retirement. Small plans remain, on average, more than twice as expensive as mega plans, Morningstar states.  

The median small plan moved the needle slightly faster, dropping 4 basis points in 2020 compared with 2019, while medium, large and mega plan total costs fell by 2, 3 and 1 bps, respectively. 

“The majority of DC plan participants are in larger plans and benefit from lower costs of these, with 80% of participants in plans charging less than 80 basis points,” the report said. 

Workers at smaller employers with smaller plans, who are saving just as much as those at employers with larger plans, could potentially have 9% less saved in assets at retirement, simply due to higher fees. 

PEPs Could Make a Big Impact 

This struggle for smaller plans to offer low-fee investments to participants is what partially motivated Congress to create pooled employer plans in 2019, as PEPs should allow more small employers to pool their assets and achieve the scale—and lower fees—of large employers, according to Morningstar.  

However, while PEPs have the potential to reduce fees for participants as new plans grow, Morningstar argued that there will be challenges due to the complex structure of allowing multiple employers to operate in one plan. 

“If there is a proliferation of PEPs without significant enough asset concentration to provide the benefits of scale larger single-employer plans enjoy, the benefits to workers could be muted,” Morningstar reported. 

Because PEPs were only rolled out in 2021, Morningstar has not fully studied them yet, but the report stated the firm’s belief they can help close the gap between small and large plans if there is “sufficient and smart uptake.” 

CITs Charge Less 

Morningstar analysts also suggested that the adoption of collective investment trusts could aid in lowering costs for smaller plans. CITs are pooled-investment vehicles organized as trusts, maintained by a bank or trust company, and are managed in accordance with a common investment strategy.  

CITs, according to Morningstar, can offer a significant benefit to workers saving for retirement through reduced expenses, as they typically charge participants less than mutual funds.  

From 2012 to 2019, looking at all plans except mega plans, assets in CITs and mutual funds both grew at roughly the same average year-over-year rates: 7.3% and 7.9%, respectively, according to the report. In the following two years, among the same cohort of plans, CIT assets grew more quickly: 10.8%, compared with 8.7% for mutual funds.  

Morningstar found that much of the growth in CIT assets occurred in plans with between $100 million and $500 million in assets. Even plans smaller than this increased their use of CITs by more than $15 billion in this two-year period, the report showed. 

“Reaching a broader range of plans has been a struggle for CITs, but the most recent data shows the tide could be turning as CIT assets in smaller plans are growing not just in raw terms, which can always be partially attributed to market returns, but also in terms of percentage of total assets,” the report stated. 

Morningstar’s report, which analyzed 2020 and 2021 plan-year data, used data filed by U.S. retirement plans on Form 5500 and collected by the U.S. Department of Labor’s Employee Benefits Security Administration. The report was limited to plans covered by Title I of the Employee Retirement Income Security Act of 1974, as these plans file Form 5500 annually.