Ten years ago this month, the Employee Benefit Research Institute, Washington, predicted there would be more money in private defined contribution plans than in their defined benefit counterparts this year.
That watershed event actually occurred only four years after EBRI made its prediction. Now, the big news - which wasn't even on anyone's radar screen in 1993 - is the real money will not be in either plan in the future, but in rollovers from both, EBRI now predicts.
"Last year I think people were shocked that IRAs had exceeded defined benefit and defined contribution assets," said Jack Vanderhei, professor at Temple University and EBRI fellow. "You ain't seen nothing yet."
At the end of 2002, there was $2.1 trillion in corporate defined contribution plans, compared with $1.59 trillion in corporate defined benefit plans, according to data released by the Federal Reserve on March 6.
This is a change from 1995, when assets in private defined contribution plans first grew even with defined benefit plans - at $1.46 trillion. Although 2002 data on individual retirement accounts have not yet been released by the Federal Reserve, a year ago there was $2.47 trillion in IRAs, the investment vehicles that benefit most from rollovers.
According to data from the Society of Professional Administrators and Record Keepers that is expected to be released in early April, there was $2.8 trillion in private sector defined contribution plans in 2002, compared with $1.8 trillion in private sector defined benefit plans, including $306 billion in union plans.
IRAs captured $2.3 trillion, SPARK's data show. Add in the $379 billion in variable annuities, and individual retirement plans, which SPARK says had a total of $2.66 trillion in 2002, and IRAs are poised to eclipse defined contribution plans.
Defined benefit plans are not expected to catch up any time soon.
"The biggest hope (for defined benefit plans) right now is to find a real, painless solution for cash balance conversions," Mr. Vanderhei said. A recent report by BNA Inc., Washington, notes some 300 applications requesting determination letters are lined up, waiting for cash balance regulations.
Rollover money will grow in part because participants' tenure in 401(k) plans is growing. Most current retirees have at most two decades with a 401(k) plan, but future retirees will have four or five decades of 401(k) participation.
Plus, more retirees will have participated in 401(k) plans and the average balance will be larger, according to a soon-to-be-released study by James M. Poterba, Mitsui Professor of Economics at the Massachusetts Institute of Technology, Cambridge, Mass.; Steven F. Venti, professor of economics at Dartmouth College, Hanover, N.H.; and David A. Wise, the John F Stambaugh Professor, Kennedy School of Government, Harvard University, Cambridge.
They predict that people in 2025 will retire with 401(k) balances that are 10 times larger than those of employees who retired in the mid-1990s, relative to their wage income or the value of their benefits from Social Security.
Meanwhile, defined benefit plan participation is starting to contract, said Joshua Dietch, associate director of Cerulli Associates Inc., Boston. In 1980, 73% of defined benefit participants were still employed, but by 2001, that percentage dropped to 53%. This means that just less than half of employees covered by defined benefit plans are either retired or no longer with that company, Mr. Dietch said. "What that suggests is that the market is contracting in real terms. Between 1986 and 2001, the defined benefit market shrunk by 4.2%, whereas the defined contribution market over the same time period grew by 1.1% in aggregate."
By late 1994, "we felt that defined benefit was a sunsetting benefit option," said Kenneth Montgomery, president and chief executive officer of Pentegra Group, White Plains, N.Y., a provider of retirement plans for community banks. He served on EBRI's board for five years during the early 1990s.
On the public fund side, however, defined contribution plans are dwarfed by defined benefit plans. Public DC plans had $380 billion in assets at year-end 2002; public DB plans had $2.2 trillion, according to SPARK.
"Defined contribution plans will never outpace defined benefit plans on a total basis because of the public plans, unless we annex Canada and put them in DC," said Robert G. Wuelfing, SPARK founder. "Defined contribution plans, especially 401(k)s, were intended as a supplemental plan, and as a supplemental plan, they met their objectives."