Lump-Sum Benefits Available from Savings and Thrift Plans

By Bucci, Michael | Monthly Labor Review, June 1993 | Go to article overview

Lump-Sum Benefits Available from Savings and Thrift Plans


Bucci, Michael, Monthly Labor Review


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. …

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