Long-term consistent growth makes the U.S. retirement system look stable, but numbers mask underlying turnover of thousands of plans and outflow of billions of dollars, according to the Retirement Plan Landscape Report from Morningstar's Center for Retirement Studies.
The defined-contributed system saw the first year-over-year decline in plans added to the system in at least a decade at the beginning of the COVID-19 pandemic, according to the report. After the pandemic accelerated plan closings and dampened plan creation, the report reveals that only 2,090 employers cover 50% of workers with retirement plan, placing a heavy burden on small employers.
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However, overall coverage of the system rebounded to pre-pandemic levels in 2021. The report noted the importance of new employers creating new plans to replace the plans that close each year – between 2012 and 2021, more than 377,000 plans closed in the U.S., according to Morningstar. In other words, the U.S. defined contribution system relies on new employers to create, on average, 44,000 plans per year to compensate for the plans that closed during that time.
"The rate of growth in plans, employers offering plans, and participants slowed significantly from 2019 to 2020 when the pandemic began, but none of the numbers saw net declines despite the significant economic shock," the report said. "Additionally, the number of plans and employers offering plans both grew by over 2% year over year from 2020 to 2021, demonstrating the strong and relatively quick rebound in the economy. The system also added more than 2.1 million participants in 2021. In comparison, 2020 was the first time since 2013 that total participation increased by fewer than 1.4 million workers."
The transition from defined benefit plans to defined contribution plans picked up speed during the pandemic. According to Morningstar, active participant numbers in the defined benefit system declined 20% as many employers closed their defined benefit plans for new employees. Still, the report emphasized that defined benefit plans will remain integral for retirement planning, noting that 33 million people already receive or will receive benefits from defined benefit plans.
Related: 401(k) plan participant investment fees declined 3% in 2022
For employers, Morningstar said the transition should signal that a large number of workers will have retirement funds in both defined benefit and defined contribution systems and retirement planning should be designed to serve that population.
"Employers managing a transition from DB to DC will clearly be part of helping these workers plan for a successful retirement, but even employers with just a DC plan are likely to have members of their workforce with some level of defined benefits from previous jobs," the report said. "Policymakers can help participants facing the complex challenge of planning for retirement when needing to use a mix of DB and DC by encouraging personalized investment recommendations."
Cost for investing
The cost to employees to invest in workplace-based retirement plans continues to drop, though workers who invest in smaller plans pay much higher prices than their counterparts in large plans, according to Morningstar.
The median cost for investing has dropped for plans of all sizes, but the gap between small and large plans remains large, according to Morningstar. The report indicates that employees at smaller organizations who participate in small plans pay approximately twice as much to invest as participants in larger plans – approximately 84 basis points (0.84%) compared to 40 basis points (0.40%) – leaving them with about 9% less saved for retirement because of higher fees.
"Saving for retirement through a workplace plan is cheaper than ever – as all U.S. investing is – but there is still a wide range of variation and your exposure to that variability largely depends on the size of your employer," wrote Lia Mitchell, senior analyst, policy research at Morningstar, in a commentary about the report.
Most defined-contribution plan participants are in large plans as Morningstar indicates that 80% of participants are in plans that charge less than 80 basis points. The report suggests that the wider adoption of collective investment trusts could play a role in lowering retirement plan costs further, and there is evidence that the spread of these trusts to smaller plans could be accelerating.
Sustainable investing
Sustainability strategies are beginning to show up more often in retirement plans, according to Morningstar. Currently, 16% of plans offer at least one in their lineup. Mitchell said sustainability represents an opportunity for retirement plans to increase participation, saying Morningstar's research indicates younger investors have a strong interest in sustainable investing.
"These investments have the potential to increase participation if they can engage employees who would otherwise not save in their workplace plan by allowing them to invest in line with their values," Mitchell wrote in her commentary. "A recent survey found that a growing number of investors, particularly millennials, expressed interest in sustainable investing."
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