Benefits and Compensation

401(k) Plans’ Cost-effectiveness Becomes Clearer as Use Increases

Employers may find this new information useful for planning or justifying their retirement plan expenses: Contrary to the popular belief that defined benefit retirement plans are more costly for employers to administer, data from the U.S. Bureau of Labor Statistics indicates that private-industry employers now spend more per employee hour worked for defined contribution plans.

When DC plan costs are divided by the number of workers enrolled, however, costs for employer sponsors are higher for the more limited number of participants in the increasingly rare DB plans, according to a December BLS bulletin. Statistics gathered by the BLS on per-employee costs by industry, worker characteristic and company size for both types of retirement plans provide benchmarks for plan sponsors monitoring costs or considering changes to plans they offer.

Private-sector DC plans cost 60 cents per employee hour worked versus 43 cents for DB plans, according to statistics from the March 2012 BLS’ Employer Costs for Employee Compensation report. But once the data is averaged by plan participants only — those employees who use or are enrolled in a plan — the costs of offering DB plans rise significantly. In the period reviewed, private-industry worker participation costs were more than 70 percent higher for DB plans than for DC offerings.

When worker participation cost — equivalent to the individual benefit cost for employers per employee hour worked divided by the individual participation rate — is figured in, DB costs per worker total $2.53 and DC costs come to $1.46.

Overall, 17 percent of employees at companies with DB plans participate in them, according to the March BLS Employer Costs data; at companies surveyed with DC plans, 41 percent of workers are enrolled.

Costs per worker for retirement plan coverage were greatest at the smallest companies included in the survey, those with one to 99 employees. Worker participation cost for DB plan coverage for these companies averaged $3.20 per hour but was less than half that amount, $1.26, for DC plan participants at the smallest firms. Not surprisingly, the DB participation rate for the largest establishments, with 500 or more workers, was six times higher (42 percent) than for the smallest companies (7 percent).

Worker participation costs for DC benefits were considerably higher for the largest companies versus the smallest.

Finding out More

For more information about DC plan expenses, see ¶285 of The 401(k) Handbook. To read the complete story on Thompson’s HR Compliance Expert, click here.