WASHINGTON - After surging for more than a decade, defined contribution plan assets fell last year for the first time.
According to the latest data from the Federal Reserve Board, it estimates defined contribution plan assets dropped to $2.52 trillion last year, down 0.4% from $2.53 trillion in 1999.
The data suggest retirement plan assets might not be growing as fast as previously estimated, in large part because of the runoff of money from private defined contribution plans.
Overall, the Federal Reserve estimates total pension fund assets, including defined contribution plans, reached $9.84 trillion at the end of 2000, up slightly from the $9.74 trillion estimated in 1999. The Federal Reserve previously had estimated total pension assets would hit $10 trillion in 1999, but lowered its estimate based on more recent numbers.
The Federal Reserve's numbers are projected from the 1997 annual reports filed by employers with government regulators, the latest numbers available.
A large part of the growth in total pension fund assets is attributable to state and local pension funds, which grew at a healthy clip to $3.12 trillion at the end of last year, up 5.4% from $2.96 trillion at the end of 1999. Private pension assets - defined benefit and defined contribution plans - dropped nearly 2% from the previous year, to $4.64 trillion.
The growth of public pension plan assets offsets some of the decline in private pension fund assets.
Thanks to the stock market descent that began last year, as well as payouts, assets of private defined benefit plans dropped 4.2% to $2.05 trillion in 2000 from $2.14 trillion in 1999.
But the biggest surprise was that assets of private defined contribution plans fell - for the first time since the Fed started tracking defined contribution plan assets in 1988. Defined contribution assets grew at a hefty clip from $594.7 billion in 1988 to $1.9 trillion in 1997.
Market slide contributed
To be sure, the stock market's skid contributed to the decline of assets.
About 39.2% of private defined contribution plan assets, which include assets in 401(k)-type plans as well as the Federal Thrift Savings Plan, which covers most federal government workers, are invested directly in stocks, the latest flow of funds statistics show. Additionally, defined contribution plans hold equities indirectly through mutual funds, and in separate accounts at insurance companies, so their total ownership of stocks is actually much higher.
But another part of the reason for the drop could be withdrawals. Fed researchers indicated they think that vast sums of money are flowing out of retirement plans into individual retirement accounts as employees change jobs or quit working.
"Lump-sum distributions are becoming a more important story," said Julia Coronado, a Federal Reserve economist who collected and analyzed the data. "Defined contribution plan growth has been tapering off, and we attribute that to distributions from these plans."
The Federal Reserve intends this year to study the extent to which money flowing out of retirement plans is being rolled over into other retirement accounts, and how much of the outflow is being spent by participants.
That is not to suggest that more money is coming out of defined contribution plans than is going in. Unlike the older, more mature defined benefit plans, defined contribution plans are still continuing to take in more money than they are paying out. Traditional pension plans have been paying out more money than they have been taking in since the mid-1990s.
While defined benefit plans paid out $37.8 billion more in 2000 than they took in, according to the Fed's estimates, defined contribution plans took in $55.1 billion more than they paid out. Still, last year's decline in defined contribution assets is worrisome, especially because companies have fled from traditional pension plans to 401(k)-type plans in droves since the 1980s.
"Defined contribution plans, from an individual's perspective, seemed like a no-lose proposition. Now the whole idea of risk comes into play," said Stephen Mirante, head of the national retirement group at Unifi Network, a Teaneck, N.J., subsidiary of PricewaterhouseCoopers LLP. If the market's slide continues, employers competing in the job market for new talent might begin trumpeting the security of old-fashioned pension plans, he said.
The Federal Reserve's data are consistent with the findings of a new study by Cerulli Associates Inc., which estimates defined contribution retirement plan assets fell 4.8% last year, to $2.22 trillion from $2.33 trillion in 1999.
"We are both saying the same thing, maybe to a different magnitude," said Peter H. Starr, a Cerulli managing director.
The Boston-based research and consulting firm also estimated that defined contribution plans paid out $190 billion, or 8.8% of their assets, last year, most of it going into IRAs, and expects that trend will continue to grow to $377 billion, or 9.5%, in 2006.
"Distributions, as a percentage of defined contribution assets, have gone up pretty significantly over the past 10 years, with a spike in the past five years," Mr. Starr noted.