Americans’ Retirement Savings

WISER’s Annual Retirement Symposium

Pulling It All Together:What Government, Employers, and Individuals

Can Do to Strengthen Women’s Retirement Security

December 3, 2009

Sarah Holden

Senior Director, Retirement & Investor Research

Overview

• Variety of ways Americans prepare for retirement

• Role of Social Security

• Experience with 401(k) plans

• Experience with IRAs

• Summary

• References

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• ICI reports total U.S. retirement market assets—accumulations earmarked for retirement.

• Households also rely on: Social Security; personal savings; home (to live in, in addition to being an asset); other tangible assets (e.g., investment real estate); and other government programs (e.g., Medicare/Medicaid).

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Americans Prepare for Retirement in a Variety of Ways

U.S. Retirement Assets

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1Other plans include private-sector DB plans; federal, state, and local pension plans; and all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension funds. Federal pension plans include U.S. Treasury security holdings of the civil service retirement and disability fund, the military retirement fund, the judicial retirement funds, the Railroad Retirement Board, and the foreign service retirement and disability fund. These plans also include securities held in the National Railroad Retirement Investment Trust and Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).2DC plans include private-sector employer-sponsored DC plans (including 401(k) plans), 403(b) plans, and 457 plan assets.e Data are estimated.Note: Components may not add to the total because of rounding.Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division (See “The U.S. Retirement Market, Second Quarter 2009,” ICI Fundamentals (October 2009))

Trillions of dollars, end-of-period, selected time periods

e ee e

IRAs

DC plans2

Other plans1

e

Retirement Assets Represent About One-Third of Household Financial Assets

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Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division (See “The U.S. Retirement Market, Second Quarter 2009,” ICI Fundamentals (October 2009))

Retirement assets as a percentage of U.S. household financial assets, end-of-period, 1974–2009:Q2

1981: 401(k) implemented16%

36%(2003)

Defined Contribution Plan Assets by Type of Plan

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*Other DC plans include Keoghs and other DC plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 401(k) features. eData are estimated.Note: Components may not add to the total because of rounding.Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, and American Council of Life Insurers (See “The U.S. Retirement Market, Second Quarter 2009,” ICI Fundamentals (October 2009))

e

e e e

Billions of dollars, end-of-period, 1998–2009:Q2

401(k) plans

• Social Security benefits are not counted in U.S. retirement market accumulations (or households’ financial assets, typically).

• Social Security plays a very important role in retiree income.

• Social Security replaces a higher percentage of income for workers with lower career earnings compared with higher earners.

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Role of Social Security

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Social Security Plays a Vital Role in Replacing Income in Retirement

First-year replacement rate; percent, median

Note: Percentage reported is scheduled benefits as a percentage of average career earnings for retired workers in the 1940–1949 birth cohort (individuals aged 60 to 69 in 2009).

Source: U.S. Congressional Budget Office (CBO’s Long-Term Projections for Social Security: 2009 Update)

Household Lifetime Earnings Quintile

• System is characterized by innovation and well suited to mobile workers.

• Women tend to have higher participation and contribution rates compared with men (controlling for income) when offered DC plans.

• What has been the impact of the recent bear market?

• 401(k) plans provide a disciplined savings framework.

• What can a full career with 401(k) plans generate in retirement?

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Experience with 401(k) Plans

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Automatic Enrollment Continues to Catch On

Percentage of 401(k) plans implementing automatic enrollment, 2002–2008

Source: Profit Sharing/401k Council of America, Annual Surveys

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Median Tenure Is Low for All Age Groups

Median years of tenure with current employer for employed wage and salary workers by age and gender, 2008

Note: Employed wage and salary workers include full- and part-time private-sector and government workers.Source: U.S. Bureau of Labor Statistics, Current Population Survey

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DC Plan Participation by Income and Gender

Percentage of participants in DC plans permitting employee elective deferrals by gender and income, 2008

Source: The Vanguard Group (See How America Saves 2009)

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DC Plan Participant Contribution Rates by Income and Gender

Average participant contribution rate (percent of income) among participants in DC plans permitting employee elective deferrals by gender and income, 2008

Source: The Vanguard Group (See How America Saves 2009)

Analysis of Consistent 401(k) Plan Participants

• Sample of 6.0 million participants with account balances each year from year-end 2003 through year-end 2008

• Changes in account balances consist of: New contributions by the participant or the employer or both; Total investment return on account balances, which depends on the

performance of financial markets and on the allocation of assets in an individual’s account; and

Withdrawals, borrowing, and loan repayments.

• The average account of this sample increased on average 7.2% per year between 2003 and 2008.

• Changes in account balances varied by age and size of initial balances.

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401(k) Account BalancesAmong consistent 401(k) participants (2003–2008)

Average1, 2

1Account balances are participant account balances held in 401(k) plans at the participants’ current employers and are net of plan loans. Retirement savings held in plans at previous employers or rolled over into IRAs are not included.2The analysis is based on a sample of 6.0 million participants with account balances at the end of each year from 2003 through 2008.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (See Holden, VanDerhei, and Alonso, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008,” ICI Perspective (October 2009))

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Change in Average Account Balance of Consistent Participants by Age, 2003–2008

Percent change in average account balance, 2003–20081, 2

1Account balances are participant account balances held in 401(k) plans at the participants’ current employers and are net of plan loans. Retirement savings held in plans at previous employers or rolled over into IRAs are not included.2The analysis is based on a sample of 6.0 million participants with account balances at the end of each year from 2003 through 2008. The age group is based on the participant’s age at year-end 2008. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (See ICI Perspective (October 2009))

Contributions tend to be large relative to account balances

Average annual change

32.4% 15.6% 9.0% 7.3% 3.4% 7.2%

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Change in Average Account Balance of Consistent Participants by Age, 2008

Percent change in average account balance, 2007–20081, 2

1Account balances are participant account balances held in 401(k) plans at the participants’ current employers and are net of plan loans. Retirement savings held in plans at previous employers or rolled over into IRAs are not included.2The analysis is based on a sample of 6.0 million participants with account balances at the end of each year from 2003 through 2008. The age group is based on the participant’s age at year-end 2008.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (See ICI Perspective (October 2009))

Contributions tend to be large relative to account balances

Higher percentage of account balance in fixed-income securities

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Savers Value the Discipline of 401(k) Investing

Percentage of DC-owning households agreeing with each statement, fall 2008

Source: ICI tabulation of GfK OmniTel survey data (October, November, and December 2008; see Reid and Holden, Retirement Saving in Wake of Financial Market Volatility (2008))

Can a Full Career with 401(k) Plans Generate Significant Retirement Income?

• EBRI/ICI 401(k) Accumulation Projection Model Baseline scenario

• Investment returns (1926–2001)• Always offered a 401(k) plan• Model observed participant behavior from the EBRI/ICI

401(k) database• Analyze cohort of participants turning 65 and retiring

between 2030 and 2039• Converted final 401(k) accumulation* into first-year

nominal income• Replacement rate = 1st year income/(final five-year

average income)

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Median Replacement Rates for Participants Turning 65 Between 2030 and 2039

Percent of final five-year average salary by income quartile at age 65

* The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. Source: EBRI/ICI 401(k) Accumulation Projection Model (See Holden and VanDerhei, “The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement,” ICI Perspective and EBRI Issue Brief (July 2005))

Experience with IRAs

• Millions of U.S. households own IRAs 52% of traditional IRA-owning households report their

traditional IRAs contain rollovers

• Few households contribute to IRAs Average contribution among men higher than average

contribution among women (not controlling for income)

• IRA withdrawal activity tends to be retirement-related

• Current Population Survey (CPS) understates the role of IRA withdrawals in retirees’ resources

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Millions of U.S. Households Own IRAs

Year Created

Number of U.S. Households with Type

of IRA, 2008(percentage of households)

Assets at Year-End 2007

(billions)e

Traditional IRA 1974 (Employee Retirement Income Security Act)

37.5 million(32.1%)

$4,197

SEP IRA 1978(Revenue Act)

SAR-SEP IRA 1986 (Tax Reform Act)

10.0 million(8.6%)

$314

SIMPLE IRA 1996(Small Business Job

Protection Act)

Roth IRA 1997(Taxpayer Relief Act)

18.6 million(15.9%)

$225

Any IRA 47.3 million(40.5%)

$4,736

e Data are estimated. Note: Households may own more than one type of IRA.

Sources: Investment Company Institute, U.S. Census Bureau, and Federal Reserve Board (See Holden and Schrass, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” ICI Fundamentals (January 2009) and ICI, “The U.S. Retirement Market, Second Quarter 2009,” ICI Fundamentals (October 2009))

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Few Households Contribute to IRAs

Do not own IRA

Contributed to IRA in tax-year

200714%59%

Sources: ICI Annual Mutual Fund Shareholder Tracking Survey and ICI IRA Owners Survey (See Holden and Schrass, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” ICI Fundamentals (January 2009))

Percentage of U.S. households, 2008

27%

More than one type of IRA

Employer-sponsored IRA contribution only

Roth IRA contribution only

Traditional IRA contribution only

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Average IRA Contributions by Gender and Filing Status Tabulations from IRS Form 5498, tax-year 2004

Source: Internal Revenue Service Statistics of Income (See Bryant, “Accumulation and Distribution of Individual Retirement Arrangements, 2004,” SOI Bulletin (Spring 2008))

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Traditional IRA Withdrawals Tend to Fund Living Expenses in Retirement

• Among U.S. households owning traditional IRAs in 2008, 22% took a distribution (made a withdrawal) in tax-year 2007.

• The most frequently cited way to calculate the withdrawal amount was the legal requirement to take minimum distributions starting at age 70½.

• 82% of U.S. households with traditional IRAs taking withdrawals were retired.

• The most frequently cited use of IRA withdrawals by retirees was to pay for living expenses (47% of retiree traditional IRA households with withdrawals).

• Plans for use of IRA withdrawals in the future are similar to pattern of use of withdrawals today.

Source: ICI IRA Owners Survey (See Holden and Schrass, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” ICI Fundamentals (January 2009))

22% of U.S. Households with Traditional IRAs in 2008 Took Withdrawals in Tax-Year 2007

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52%

26%

4%

Percentage of U.S. households with traditional IRAs, 2008

Source: ICI IRA Owners Survey (See Holden and Schrass, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” ICI Fundamentals (January 2009))

Traditional IRA Withdrawals Are Often Based on Required Minimum Distributions (RMDs)

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11%

18%

Percentage of traditional IRA-owning households with withdrawals in tax-year 2007

Source: ICI IRA Owners Survey (See Holden and Schrass, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” ICI Fundamentals (January 2009))

4%

Household Survey Data Tend to Understate IRA Withdrawals

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Total Annual Receipts in Tax-

Year 2006(billions)

Current Population Survey persons with regular withdrawals from IRAs, Keoghs, and DC plans $6.4

Survey of Consumer Finances family basis, any withdrawals from IRAs $95.2

ICI family survey basis, any withdrawals from IRAs$71.6

IRS tax return basis, taxable IRA distributions$124.7

Note: IRA withdrawals include traditional and Roth withdrawals for the 2006 tax year. Sources: ICI tabulations of Current Population Survey and Survey of Consumer Finances; Internal Revenue Service Statistics of Income Division; ICI Annual Mutual Fund Shareholder Tracking Survey ; and ICI IRA Owners Survey (See Sabelhaus and Schrass, “The Evolving Role of IRAs in U.S. Retirement Planning,” ICI Perspective (November 2009))

Summary

• Americans save for retirement in many buckets some earmarked specifically for retirement, others include personal savings and home.

• Social Security is the bedrock of American retirement security, especially for lower-income households.

• DC plans and IRAs are innovative and designed to serve mobile workers.

• IRAs represent an opportunity to save that many more individuals – including nonworking spouses – could use.

• Retirement accounts’ role in retirement income tends to be understated in official household surveys.

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Build on the Strength of Current Retirement Savings System

• Put Social Security on sound financial footing.

• Encourage voluntary employer-sponsored plans. Innovation (automatic enrollment; automatic increase in

employee contribution rates; target date funds) Flexibility (employer contributions; range of investment

options; rollover and distribution options)

• Improve disclosure about all 401(k) investments.

• Redouble efforts to provide financial and investor education to Americans of all ages.

*For additional suggestions, see Stevens “Strengthening Worker Retirement Security” (February 24, 2009).

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References

Bryant, Victoria L. 2008. “Accumulation and Distribution of Individual Retirement Arrangements, 2004.” Statistics of Income Bulletin (Spring): 90–101. Washington, DC: Internal Revenue Service Statistics of Income Division. Available at www.irs.gov/pub/irs-soi/04inretirebul.pdf.

Federal Reserve Board. 2009. “Flow of Funds Accounts of the United States: Flows and Outstandings, Second Quarter 2009.” Z.1 Release (Sept. 17). Washington, DC: Board of Governors of the Federal Reserve System. Available at www.federalreserve.gov/releases/z1.

Holden, Sarah, and Daniel Schrass. 2009. “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008.” ICI Fundamentals, Vol. 18, No. 1 (January). Washington, DC: Investment Company Institute. Available at www.ici.org/pdf/fm-v18n1.pdf.

Holden, Sarah, and Jack VanDerhei. 2005. “The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement.” ICI Perspective and EBRI Issue Brief (July). Available at www.ici.org/pdf/per11-02.pdf.

Holden, Sarah, Jack VanDerhei, and Luis Alonso. “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008.” ICI Perspective and EBRI Issue Brief (October). Available at www.ici.org/pdf/per15-02.pdf.

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References (cont.)

Investment Company Institute. 2009. “The U.S. Retirement Market, Second Quarter 2009.” ICI Fundamentals, Vol. 18, No. 5-Q2 (October). Washington, DC: Investment Company Institute. Available at www.ici.org/pdf/09_q2_retmrkt_update.pdf.

Profit Sharing/401k Council of America. 2009. 52nd Annual Survey of Profit Sharing and 401(k) Plans: Reflecting 2008 Plan Experience. Chicago, IL: Profit Sharing/401k Council of America (www.psca.org).

Reid, Brian, and Sarah Holden. 2008. Retirement Saving in Wake of Financial Market Volatility. Washington, DC: Investment Company Institute. Available at www.ici.org/pdf/ppr_08_ret_saving.pdf.

Sabelhaus, John, and Daniel Schrass. 2009. “The Evolving Role of IRAs in U.S. Retirement Planning.” ICI Perspective, Vol. 15, No. 3 (November). Available at www.ici.org/pdf/per15-03.pdf.

Stevens, Paul Schott. 2009. “Strengthening Worker Retirement Security.” Testimony before the Education and Labor Committee U.S. House of Representatives (February 24). Available at www.ici.org/policy/ici_testimony/09_house_401k_tmny.

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References (cont.)

U.S. Congressional Budget Office. 2009. CBO’s Long-Term Projections for Social Security: 2009 Update. Washington, DC: U.S. Congressional Budget Office (August). Available at www.cbo.gov/ftpdocs/104xx/doc10457/08-07-SocialSecurity_Update.pdf.

U.S. Department of Labor, Bureau of Labor Statistics. 2008. “Median years of tenure with current employer for employed wage and salary workers by age and sex, selected years, 2008.” Economic News Release (September 26). Available at www.bls.gov/news.release/archives/tenure_09262008.pdf.

U.S. Department of Labor, Employee Benefits Security Administration. 2009. Private Pension Plan Bulletin Historical Tables and Graphs (February; Version 1.0). Washington, DC: U.S. Department of Labor, Employee Benefits Security Administration. Available at www.dol.gov/ebsa/pdf/1975-2006historicaltables.pdf.

The Vanguard Group. 2009. How America Saves 2009: A Report on Vanguard 2008 Defined Contribution Plan Data. Valley Forge, PA: Vanguard Center for Retirement Research. Available at https://institutional.vanguard.com/iam/pdf/HAS09.pdf.

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