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Lump-sum benefits available from savings and thrift plans.

Vastly different lump-sum benefit amounts were available to participants in employer-sponsored savings and thrift plans in 1991. The size of the account balance depended on the length of employee participation in the plan, the level of contributions made to the plan, and the rate of interest earned by the plan's assets. Such differences could occur even if participants had similar earnings during the entire period of plan participation.

This report presents the results of a study of provisions of savings and thrift plans included in the Bureau of Labor Statistics 1991 Employee Benefits Survey. [1] The survey designed a savings and thrift model to use these provisions to formulate estimates of the lump-sum benefits that employees can expect to receive upon retirement. [2] The data presented in this report were derived by aggregating provision data collected by the survey and comparing those data to a series of assumptions about worker salary and service and investment results. [3] This report also provides the results of recalculations of previously published lump-sum distribution estimates based on the 1989 survey. [4]

With a constant 6-percent return on plan assets and $35,000 final annual earnings in 1991, the lump-sum benefit available to a typical savings and thrift plan participant ranges from $41,000 for an employee with 10 years of plan participation to $98,000 for an employee with 25 years of participation. The difference in the final lump-sum benefit becomes even more marked as the length of plan participation increases beyond 25 years.

Retirement plans

Of the two basic types of pension plans--defined benefit and defined contribution---defined benefit pension plans are the more traditional. These plans include specific formulas for determining the employee's benefit upon retirement. The formulas are usually stated as a flat dollar amount or a percentage of final earnings multiplied by years of service. In contrast, defined contribution plans specify the level of the employer's annual contribution to the plan rather than the final benefit available to the employee. The amount of the final benefit depends on various factors, including total plan contributions, investment earnings, and the length of plan participation.

The extent of coverage under the more traditional defined benefit pension plans has declined in recent years. In 1985, four-fifths of full-time employees in medium and large private establishments participated in an employer-sponsored defined benefit plan; by 1.989, this proportion had fallen to about twothirds, and, by 1991, to three-fifths. [5] Unlike defined benefit plans, the incidence of defined contribution plan participation has remained relatively constant in recent years; nearly one-half of full-time employees in medium and large establishments participated in such plans in 1989 and 1991.

Many types of defined contribution plans are available, including profit sharing, money purchase pension, employee stock-ownership, and savings and thrift plans. Since the Employee Benefits Survey began tabulating participation in defined contribution plans in 1985, savings and thrift plans have been the most prevalent: this was again the case in 1991, as three-tenths of full-time employees participated in such plans.

Savings and thrift plans. Savings and thrift plans permit employees to allot a portion of their annual income to an individual plan account. In nearly all cases, the employee's contribution is made on a pretax basis: the amount of income deferred is not subject to income taxes until the time it is withdrawn. The amount of the allowable contribution is restricted, either by the employer or, in the case of pretax deferrals, by the Internal Revenue Service. A portion of the employee's contribution is matched by the employer, based on a stated formula, and employer and employee contributions are then invested.

The employee typically becomes vested in the portion of the account contributed by the employer based on a length of service schedule; employee contributions are always fully vested. [6] Provisions for loans and withdrawals may be included in the savings and thrift plan. Distribution of funds from the plan account usually takes the form of a lump-sum payment at retirement. Exhibit 1, above, presents vesting and other criteria for a hypothetical savings and thrift plan.

Lump sums at retirement

Because savings and thrift plans require employers to specify an annual contribution to the plan rather than specify the final benefit, the lump-sum benefit depends on a variety of factors, including years of plan participation, annual contributions, and investment earnings. Table 1 shows the average lump sum benefit available at retirement to full-time participants in savings and thrift plans given various years of plan participation, final annual earnings levels, and rates of interest. The results are not surprising. As the level of the participant's final annual earnings increases, the amount of the lump sum benefit increases. Likewise, as a participant's length of service increases, so does the value of his or her account. Similar results are seen as returns on investments increase.

The combination of these three variables the interest rate, an employee's salary, and the amount of time an employee has participated in a plan-can result in very different lump-sum payments upon an employee's retirement. For example, lower paid employees with lengthy participation in a plan can receive benefits similar to those received by more highly paid employees who have not participated for such long periods. (See table 1 .) To illustrate this point: two employees participate in a plan in which the assets earn a constant 6-percent return during the period of plan participation. One employee retires with final annual earnings of $35,000 after 25 years of participation and receives a lump-sum benefit of $98,343; the other employee retires with final earnings of $55,000 after 15 years of participation and receives a lump-sum of $95,260.

Of the three variables, the interest rate has the greatest effect on the amount of the final lump sum benefit. As the interest rate increases, the proportion of the final benefit that is derived from accrued interest becomes more evident. (See table 2.) At an interest rate of 6 percent, the contributions of an employee with annual earnings of $35,000 make up 52 percent of the fund balance at 10 years of participation; accrued interest accounts for 27 percent; and the employer's matching contributions, 21 percent. However, at a 10-percent interest rate, the employee contribution and accrued interest rate are virtually the same, 42 percent and 41 percent. At an interest rate of 15 percent, accrued interest makes up a majority of the fund balance-even after just 10 years of plan participation.


1. The Employee Benefits Survey studies the incidence and characteristics of benefits provided by employers in the workplace. Three separate surveys are conducted: small private establishments (1-99 employees) and State and local governments are surveyed in even numbered years and larger private establishments (100 or more employees) are surveyed in odd numbered years. The data discussed in this article are published in greater detail in Employee Benefits in Medium and Large Private Establishments, 1991, Bulletin 2422, (Bureau of Labor Statistics, May 1993).

2. The model also is used to derive the average allowable annual employee and employer contributions to savings and thrift plans. These data are presented in Employee Benefits in Medium and Large Private Establishments.

3. For a detailed description of the model, see Michael Bucci, "Contributions to savings and thrift plans," Monthly Labor Review, November 1990, pp. 28-36.

4. See Bucci, "Contributions to savings and thrill plans." Data on savings and thrift plans were introduced in that article. An error in some of the methodology used required tables 4 and 5 to be revised. Revised data for 1989 are presented in tables 1 and 2 of this report. These revised tables should be used in comparing 1989 and 1991 survey results. This series on provisions in savings and thrift plans will appear as a regular part of the Bureau's biennial survey of medium and large private establishments.

5. Some of the observed decline between 1985 and 1989 may be the result of a change in survey scope. Before 1988, the BLS survey of medium and large private establishments excluded most of the service industries and included only establishments with at least 250 workers in the mining, construction, retail trade, and some manufacturing and transportation industries. Beginning in 1988, the scope of the survey was expanded to include all private sector establishments employing more than 100 workers in all industries.

6. Vesting refers to the number of years of plan participation required before an employee's benefits become nonforfeitable.

Michael Bucci is an economist in the Division of Occupational Pay and Employee Benefit Levels, Bureau of Labor Statistics.
 Exhibit 1. ABC Company
savings and thrift plan
Eligibility requirement:
 Age 21 years
 Service--12 months
Employee contributions:
 Minimum-- 1 percent of earnings
 Maximum--15 percent of earnings
Pretax status of employee
 At option of the employee,
 all contributions may be pretax
Employer matching formula:
 Employee contributions up to 6
 percent of earnings are matched
 at the rate of 50 percent
Investment options:
 Equity account
 Money market fund
 Company stock
Vesting schedule for employer
Length of service percentages
1 year ........ 20 percent
2 years ....... 40 percent
3 years ....... 60 percent
4 years ....... 80 percent
5 years ....... 100 percent
 Allowed, with restrictions
 Financial hardship reasons only
Distribution upon termination or
 Lump sum

[Tabular Data Omitted]
COPYRIGHT 1993 U.S. Bureau of Labor Statistics
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Bucci, Michael
Publication:Monthly Labor Review
Date:Jun 1, 1993
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