july 2012 savings coalition retirement savings event

® Employee Benefit Research Institute 2012

30th Anniversary of the Universal IRA: A Time to Look at All

Retirement Savings Today and Going Forward

Jack VanDerhei

Research Director, Employee Benefit Research Institute

[email protected]

Savings Coalition of America

July 18, 2012

1


Questions to consider

• What is the best way to assess the current state of retirement

savings?

• Primary focus on 401(k) plans

• Preliminary evidence of adding IRAs (regular and rollover)

• Given current contribution and asset allocation behavior, what is the

potential for retirement savings for those covered by 401(k) plans for

an entire career?

• Voluntary enrollment vs. automatic enrollment

• High income vs. low income employees

• Bottom line: How does all of this impact retirement income adequacy

for those still working?

• Impact of 401(k) eligibility on at-risk ratings for Gen Xers

• Impact of recent proposals to modify the Federal tax incentives

2


Best way to assess the current state of 401(k) plans?

• Overall average balances? • Overall average = $60,329 (year-end 2010)

• Based on individual administrative records of more than 23 million participants

• EBRI/ICI Participant-Directed Retirement Plan Data Collection Project

• Problems:

• This will include young employees with many years until retirement

• Even if one looks only at those close to retirement age

• Problem with employees who may have changed jobs recently

• Participant balances by age and tenure • Average for participants in their 60s with at least 30 years of tenure with current employer

• $202,329 (year-end 2010)

• Average for NWD* participants 55-64 with at least 30 years of tenure with current employer

• $255,075 (year-end 2010)

• 6/30/12 estimate = $296,142

• Add in amounts that these participants have in IRAs • Upon job change many 401(k) participants will roll over their 401(k) balances into an IRA

• Simulated account balances or replacement rates at retirement age • Many of those now approaching retirement have not had the opportunity to be covered by a 401(k) plan their

entire career (November 1981 Proposed Regs)

• Changes in plan design (e.g., move to auto enrollment with auto escalation)

3

*NWD = only participants with positive values for the

sum of employee and employer contributions in 2010.


Source: preliminary analysis of 2010 integrated EBRI defined

contribution/IRA database

30s 40s 50s 60s

0-2 3.15 4.89 6.82 8.53

2-5 1.52 2.01 2.69 3.54

5-10 1.22 1.40 1.69 2.09

10-20 1.13 1.16 1.27 1.53

20-30 1.11 1.12 1.28

> 30 1.14 1.23

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

How Much Is Missing By Not Looking at IRAs Also?

Median ratios of combined 401(k) and IRA balances as a multiple of 401(k) balance by age and tenure.

Analysis limited to individuals with both 401(k) and IRA balances at the end of 2010.

Average 2010 combined 401(k) and IRA balances

for these participants in their 60’s= $275,517


Median Replacement Rates from Voluntary Enrollment

401(k) Plans for Participants Reaching Age 65 Between

2030 and 2039, by Income Quartile at Age 65

Lowest incomequartile

Highest incomequartile

Median ReplacementRates for 401(k)Participant with

Continous Eligibility

51% 67%

Bear market at startof career

48% 64%

Bear market atmiddle of career

43% 57%

Bear market at endof career

37% 49%

Assuming Do NotAlways Have 401(k)Plan Coverage (no

bear market)

23% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

No

min

al R

ep

lac

em

en

t R

ate

s

• For the LOWEST income quartile, current

participants who are assumed to always be eligible

to participate in a 401(k) plan are simulated to

have a median replacement rate from 401(k)

accumulations* of 51 percent

• Assuming an ad-hoc temporary bear market will

decrease this by different percentages depending

on when it happens

• Worst if it hits at the end of the career (37

percent)

• However this is still significantly better than a

current participant with “random” coverage in the

future even if there is no ad-hoc temporary bear

market assumed (23 percent)

• Bottom line: having continuous eligibility (i.e.,

employers offering plans) is the critical factor in

producing adequate retirement income for these

employees

5

Source: Holden and VanDerhei (November 2002)

* 401(k) accumulations include IRA rollovers


Success* Rates of Achieving a Combined 80% Real Replacement

Rate From Social Security and Automatic Enrollment 401(k) Plans with Automatic

Escalation, as a Function of Maximum Employee Contributions

• Unlike the more traditional type of 401(k) plan,

automatic enrollment plans (especially those with

automatic escalation of contributions) are relatively

new

• Simulating success rates under these plans requires

several types of behavioral assumptions

• A total of 16 different scenarios have been

modeled but this graph shows only the most

optimistic and most pessimistic set of

assumptions

• Looking at workers currently ages 25–29 who will

have more than 30 years of simulated eligibility for

participation in a 401(k) plan:

• workers in the highest income quartile:

between 41 and 64 percent are expected to

have at least an 80 percent real replacement

rate when 401(k) accumulations are combined

with Social Security benefits

• Given their higher relative levels of Social

Security benefits, the percentages are even

higher for workers in the lowest income

quartile– between 62 and 79 percent

6

6% 9% 12% 15%

Lowest,Optimistic

48.9% 64.2% 73.5% 79.2%

Highest,Optimistic

28.9% 41.0% 53.0% 64.0%

Lowest,Pessimistic

45.7% 56.4% 61.0% 62.1%

Highest,Pessimistic

27.0% 34.1% 38.8% 41.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pro

bab

ilit

y

Maximum Employee Contributions

Source: VanDerhei and Lucas (November 2010)

* "Success" is defined as achieving an 80 percent real replacement rate from Social Security and 401(k)

accumulations combined. The population simulated consists of. Workers are assumed to retire at age 65

and all 401(k) balances are converted into a real annuity at an annuity purchase price of 18.62.

® Employee Benefit Research Institute 2012 7

60.7%

41.1%

30.6%

18.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0 1-9 10-19 20+

Future years of 401(k) eligibility

Impact of future years of 401(k) eligibility on 2012 at‐risk*

ratings for Gen Xers

*An individual is considered to be at‐risk in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate minimum retirement

expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance and

out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid).

The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans,

IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump‐sum distribution scenario is chosen), and net housing equity ( in the form of a

lump‐sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar

analysis for replacement rates, standard‐of‐living and other thresholds.

Source: EBRI Retirement Security Projection Model,® Version 120201.

Source: VanDerhei (May 2012)

At-risk ≈ probability that the household will run

“short” of money in retirement


The previous averages and projections were based on the

current Federal Income Tax incentives for 401(k) plans.

What happens if that is no longer the case?

• Testimony at the Senate Finance Committee

Hearing (September 2011) analyzed a

proposal to modify the Federal tax treatment

of employer and employee contributions for

401(k) plans in exchange for an 18 percent

match from the Federal government

• Since that time EBRI has surveyed workers

currently contributing to a 401(k) plan and

sponsors currently offering 401(k) plans

• Graph shows the simulated average

percentage reductions in 401(k) balances at

retirement for employees currently 26-35.

• By plan size

• By employee’s income quartile

• For the lowest income employees in plans

with less than $10 million in assets, the

average reductions are 36 to 40 percent

8

Lowestincomequartile

2 3Highestincomequartile

<1M 36.4% 28.8% 22.8% 26.5%

1-10M 40.1% 32.4% 26.9% 31.5%

10-50M 22.8% 13.7% 7.4% 12.8%

50-250M 20.2% 11.4% 3.3% 8.5%

250-500M 20.2% 10.4% 3.2% 8.3%

>500M 23.5% 12.2% 6.8% 13.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Average Percentage Reductions in 401(k) Account Balances at Social Security Normal Retirement Age

Source: VanDerhei (April 2012)


References (available for free download at www.ebri.org)

• Holden and VanDerhei (November 2002), Can 401(k) Accumulations Generate Significant Income

for Future Retirees? EBRI Issue Brief and ICI Perspective

• VanDerhei (July 2011) “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of

the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,”

EBRI Notes

• VanDerhei (April 2012), “Tax Reform and Tax‐Favored Retirement Accounts,” Testimony for the

House Committee on Ways and Means.

• VanDerhei (May 2012). Retirement Income Adequacy for Boomers and Gen Xers: Evidence from

the 2012 EBRI Retirement Security Projection Model®, EBRI Notes

• VanDerhei, Holden, Alonso and Bass (December 2011), “401(k) Plan Asset Allocation, Account

Balances, and Loan Activity in 2010” (pp. 68). December 2011, EBRI Issue Brief #366

• VanDerhei and Lucas (November 2010), The Impact of Auto-enrollment and Automatic

Contribution Escalation on Retirement Income Adequacy, EBRI Issue Brief

9


Appendix: Brief Chronology of the EBRI

Retirement Security Projection Model®

• 2001, Oregon

o Simulated retirement wealth vs. ad hoc thresholds for retirement expenses

• 2002, Kansas and Massachusetts

o Full stochastic retiree model: Investment and Longevity risk, Nursing home and home health care costs

o Net housing equity

• 2003, National model

o Expanded to full national sample

• 2004, Senate Aging testimony (January)

o Impact of everyone saving another 5 percent of compensation

• 2004, EBRI Policy forum (May)

o Impact of annuitizing defined contribution/IRA balances

• 2006, EBRI Issue Brief (March)

o Evaluation of defined benefit freezes on participants

• 2006, EBRI Issue Brief (September)

o Converted into a streamlined individual version for the ballpark estimate Monte Carlo

• 2008, EBRI policy forum (May)

o Impact of converting 401(k) plans to automatic enrollment

• 2009, Pension Research Council

o Winners/losers analysis of defined benefit freezes and enhanced defined contribution employer contributions provided as a quid pro quo

• 2010, EBRI Issue Brief (April)

o Impact of modification of employer contributions when they convert to automatic enrollment for 401(k) plans

o 2010, EBRI Issue Brief (July)

o Updated model to 2010, included automatic enrollment for 401(k) plans

o 2010, EBRI Notes (September)

o Analyzes how eligibility for participation in a DC plan impacts retirement income adequacy

o 2010, EBRI Notes (October)

o Computes Retirement Savings Shortfalls for Boomers and Gen Xers

o 2010, Senate HELP testimony (October)

o Analyzes the relative importance of employer-provided retirement benefits and Social Security

o 2010, EBRI Issue Brief (November)

o The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy


Appendix (continued)

o 2011, February EBRI Issue Brief

o Analyzes the impact of the 2008/9 crisis in the financial and real estate markets on retirement income adequacy

o 2011, EBRI policy forum (May)

o Analyzes impact of deferring retirement age

o 2011, July EBRI Notes article

o Analyzes the impact of the 20/20 limit recommended by the National Commission on Fiscal Responsibility and Reform

o 2011, August EBRI Notes article

o Analyzes value of defined benefit plans

o 2011, Senate Finance Hearing (September)

o Analyzes the impact of modifying tax incentives for defined contribution plans

o 2012, Urban Institute Presentation

(February)

o Analyzes whether Boomer and Gen X

women will be able to afford

retirement at age 65

o 2012, March EBRI Notes article

o Analyzes employer and employee

reaction to proposal to modify tax

incentives for defined contribution

plans and simulates the expected

impact on account balances at

retirement age

o 2012, May EBRI Notes article

o Updates RSPM to 2012

o 2012, June EBRI Notes article

o Analyzes the impact of eligibility for

participation in a 401(k) plan on Gen

Xers

11


Household balances

• 2010 SCF (for all defined contribution plans with current employer for households)

• Overall average = $121,000 (regardless of age and tenure)

• Household average of $424,874 for head of family 55-64 with at least 20 years of tenure with current

employer

• Nb: very small sample size for SCF -- only 2100 households (for all age/tenure combinations)

with defined contribution plans currently

• Combined defined contribution and IRA (for those with both):

• Overall average = $343,000 (regardless of age and tenure)

12


Upside down incentives?

• From a financial economics perspective,

the current federal tax treatment for 401(k)

plans has advantages for workers with a

higher marginal tax rate IF other elements

of the tax code are ignored

• IRC Sections 402(g) and 415(c) combined

with ADP requirements have resulted in a

relatively flat multiple of final earnings at

retirement as a function of salary (graph)

13

0%

50%

100%

150%

200%

250%

300%

350%

400%

Salary Range

>10–20 Years

>20 Years

Year-end 2010 Ratio of 401(k) Account Balance to

Salary for Participants in Their 60s, by Tenure

Source: VanDerhei, Holden, Alonso and Bass (2011)

Note: The tenure variable is generally years working at current

employer, and thus may overstate years of participation in the

401(k) plan.


0%

2%

4%

6%

8%

10%

12%

14%

16%

26−35 36−45 46−55 56−65

Average Percentage Reductions in 401(k) Account Balances at Social Security NRA,a by Imposing 20/20 Limits in 2012,

by Age and Age-specific Salary Quartiles

Lowest

2

3

Highest

Source: EBRI Retirement Security Projection Model Version 110627c1. a Normal retirement age.

NB: this simulation only models the financial impact of the expected reduction in 401(k) contributions for employees who are not automatically enrolled by

imposing the new limits and does not attempt to assess behavioral modifications on the part of either the plan sponsor nor the employees assumed to be

eligible for participation in the plan. The simulated rates of return are the same as in VanDerhei and Copeland (July 2010). This version of the analysis assumes

no job turnover, withdrawals or loan defaults. The full stochastic nature of the model will be included in future analysis.

Participant Income Group

Re

du

ction

in A

cco

un

t

Source: VanDerhei (July 2011)


15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%100%

105%

110%

115%

120%

125%

130%

135%

140%

145%

Lowest–income quartile, all pessimistic 0% 0% 0% 0% 0% 2% 6% 9% 13% 20% 26% 35% 44% 54% 64% 71% 77% 80% 83% 86% 88% 90% 92% 93% 94% 95% 95%

Highest-income quartile, all pessimistic 0% 1% 2% 4% 7% 12% 19% 28% 37% 46% 55% 63% 69% 73% 76% 80% 83% 85% 87% 89% 90% 91% 92% 93% 94% 94% 95%

Lowest-income quartile, all optimistic 0% 0% 0% 0% 0% 2% 5% 6% 7% 9% 11% 14% 17% 21% 25% 31% 37% 43% 50% 57% 64% 69% 73% 77% 78% 81% 83%

Highest-income quartile, all optimistic 0% 1% 2% 2% 3% 4% 6% 8% 10% 14% 19% 24% 30% 36% 43% 50% 55% 60% 64% 68% 71% 73% 76% 78% 80% 82% 84%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Combined Real Replacement Rate

Source: EBRI Retirement Security Projection Model, versions 100810a1–100810a16.

* Cumulative distribution functions.

CDFs* of the Two Extreme Combinations of Design Variables and

Employee Response Assumptions for Employees Currently Ages 25–29 and

Assumed 31–40 Years of Eligibility, High- vs. Low-salary Quartiles

Source: VanDerhei and Lucas (November 2010)

july 2012 savings coalition retirement savings event

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