DC System Passes Its Stress Test

In the late 1980’s, employer-sponsored defined contribution plans were beginning to emerge as the primary retirement vehicle offered by private employers. Some in the retirement community forecast that a drastic fall in asset values, like that experienced from the fall of 2007 to the spring of 2009, would lead to the collapse of the defined contribution system. It was hypothesized that if there were a dramatic decline in the value of defined contribution plan assets not only would plan participants stop contributing to plans, their anger with their employers would damage workplace harmony.

On May 5-6, 2011, I delivered a paper at the 2011 Pension Research Council Symposium “Reshaping Retirement Security: Lessons for the Global Financial Crisis” exploring how private employer defined contribution plan sponsors and participants responded to the dramatic financial events beginning in the fall of 2007. By setting 2006 as a baseline and reporting plan sponsor and participant behavior for the 2007 through 2010 period, the paper reviews various plan sponsor and participant choices as they were influenced by the financial events.

I found that virtually all private employers that sponsored defined contribution plans have continued that sponsorship during this difficult period. While some employers briefly suspended or reduced their matching and other contributions to their plans, the majority continued making contributions at pre-2007 levels. Most participating employees continued to contribute to their defined contribution plans. On the micro level, plan sponsors took a variety of actions, especially concerning plan investments and participant education. Sponsors changed the investment lineup, added investment advice as an option for participants, increased their employee education efforts, more closely scrutinized plan fees, increased the use of investment policy statements, and increased the frequency with which they reviewed plan investments. Participants continued saving, except in the case where the employer suspended or reduced the match. At companies that suspended or reduced the match, both participation and contribution rates declined. Plan loan usage remained constant, hardship withdrawals were up but were still taken by less than 3 percent of participants, and most participants maintained a diversified allocation in their defined contribution portfolios.

Those concerned in the 1980s with how the employer-sponsored defined contribution system would perform in difficult times have their answer. The employer-sponsored defined contribution system has been put to the ultimate stress test resulting in little change in employer sponsorship and employee participation in the plans. Even more important, as employers and participants stayed the course and maintained their savings and investing in the plans, the account balances and contribution levels in the plans have been able to recover as markets and economic trends have improved. The PowerPoint I used for my presentation can be accessed at: http://www.pensionresearchcouncil.org/conferences/conf-2011.php