Who Gets Retirement Plans and Why

Abstract

There is considerable interest in developing public policies that can increase savings and help individuals prepare for retirement. One line of effort aims to increase participation in employer-sponsored pension plans, such as 401(k) plans, at firms that currently offer plans. Another line of effort aims to encourage firms that do not currently offer a retirement plan to adopt a plan. As the retirement industry and policymakers try to increase coverage, it is important to understand the motives at play and why more employers do not currently sponsor plans. To that end, it is necessary to understand which workers currently have access to and participate in employer-sponsored retirement plans, and why certain employees desire and certain employers offer compensation in the form of retirement benefits. This paper examines the various factors that lead some workers to favor compensation that includes both cash compensation and retirement benefits over cash alone, and it discusses the factors that lead some employers to offer retirement benefits. One finding is that differences in workforce composition, rather than administrative costs, appear to be a primary cause for the low rate at which small employers sponsor retirement plans. As a group, the characteristics of small-firm employees differ substantially from the characteristics of large-firm employees. Nevertheless, workers at small firms that sponsor plans are very similar to workers at large firms that sponsor plans, and workers at small firms that do not sponsor plans are very similar to workers at large firms that do not sponsor plans.

Keywords: pensions, retirement plans, replacement rates, pension coverage

JEL Classification: D10, D91, H20, H30, J26, J32, J33, J38, K31