retirement savings: facts, trends, and issues

© Employee Benefit Research Institute 2013

Retirement Savings: Facts, Trends, and Issues

Dallas L. Salisbury

President and CEO

Employee Benefit Research Institute

April 8, 2013

[email protected]

1


2

DC 1974 – Pre ERISA, DOL and PBGC – Age 24

EBRI Founding 1978 … 9/28/2013 is 35th Anniversary………..Age 64

39 Years of Retirement Research and Policy Analysis


3

Annuity DB to LSD DBto Hybrid LSD DB to LSD DCTo Rollover IRATo Roth IRA

Spend More on No Risk One Year Promise + Move Cost and Risk to Employee (inflation, investment, longevity)


4

Relative importance of employer costs for employee compensation, March 2012

___________________________________________________________________________________________________Compensation Civilian Private State and local component workers industry government___________________________________________________________________________________________________Wages and salaries 69.3% 70.4% 65.2%Benefits 30.7 29.6 34.8 Paid leave 7.0 6.9 7.3 Supplemental pay 2.4 2.9 0.8 Insurance 8.9 8.1 12.0 Health benefits 8.5 7.7 11.6 Retirement and savings 4.6 3.6 8.5 Defined benefit 2.8 1.5 7.7 Defined contribution 1.8 2.1 0.8 Legally required 7.8 8.2 6.1___________________________________________________________________________________________________

_____________

The Employer Costs for Employee Compensation for June 2012 is scheduled to be released on

Tuesday, September 11, 2012, at 10:00 a.m. (EDT).


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6

Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-2011

* Distribution is statistically different from the previous year shown (p<.05). No statistical tests were conducted for years prior to 1999. No statistical tests are conducted between 2005 and 2006 due to the addition of HDHP/SO as a new plan type in 2006.

Note: Information was not obtained for POS plans in 1988. A portion of the change in plan type enrollment for 2005 is likely attributable to incorporating more recent Census Bureau estimates of the number of state and local government workers and removing federal workers from the weights. See the Survey Design and Methods section from the 2005 Kaiser/HRET Survey of Employer-Sponsored Health Benefits for additional information.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2011; KPMG Survey of Employer-Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988.

1%

1%

1%

1%


8

Percentage of Private Sector Workers Participating in an Employment-Based Retirement Plan by Plan Type, 1979-2009*

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0%

5%

10%

15%

20%

25%

30%

35%

DB onlyDC onlyBoth

Source: DoL Form 5500 Summaries through 1998. *EBRI estimates 1999-2009


Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039 (percent of final five-year average salary)

50.7 54.059.5

67.2

27.724.723.223.2

1 2 3 4

Baseline Don't always have a 401(k)

27.5 30.8 34.7 39.4

Income Quartile at Age 65

Turnover With Non-Preservation Affect Results Dramatically


Male Prime-Age (25-64) Workers Median Tenure Trends, By Age, 1951-2010 (High Mobility)

3.52.7 2.7

4.5

7.6

6.06.7

7.36.5

6.15.5 5.3 5.2 5.2 5.3

7.6

11.4 11.5 11.8

10.19.4 9.5 9.6

8.1 8.2 8.5

9.3

13.0

14.5 14.615.3

14.5

13.4

10.511.2

10.2 10.29.8 9.5

10.1 10.4

3.22.82.93.02.82.72.82.8

3.2 3.2 3.1 3.1 3.0

5.1

7.0

5.0

6.9

8.8

11.0

12.8

9.1

11.2

14.7

0

2

4

6

8

10

12

14

16

18

1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010

Year

Yea

rs o

f Ten

ure

Ages 25-34

Ages 35-44

Ages 45-54

Ages 55-64

Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010) from the U.S. Department of Labor, Bureau of Labor Statistics.


Female Prime-Age (25-64) Workers Median Tenure Trends, by Age, 1951-2010 (High Mobility)

1.8 2.0 1.92.2

1.6

3.03.13.6 3.5 3.6 3.6

4.14.4 4.3 4.2

4.9

6.15.7 5.9 5.9

6.3

7.0 7.2 7.37.0 7.1

4.5

7.8

8.88.5

9.8 9.7 9.9 10.09.6

9.99.6 9.8 9.7

2.62.5 2.5 2.5

2.82.82.8 2.6 2.72.7

4.74.5

4.64.84.5 4.5

6.7

4.0

6.8 6.76.5 6.4

9.2

9.29.0

0

2

4

6

8

10

12

1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010

Year

Years

of

Tenure

Ages 25-34

Ages 35-44

Ages 45-54

Ages 55-64

Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, and 2010) from the U.S. Department of Labor, Bureau of Labor Statistics.


Percentage of Those Age 65 or Older With Pension Income, 1975-2010

1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 201022%

24%

26%

28%

30%

32%

34%

36%

38%

40%

25.0%

25.5%

27.3%

27.4%

30.3%31.5%

34.6%35.9%

37.7% 37.5%

35.6%

36.4%

35.0%

35.0% 35.3%

35.0%

35.5%

35.0%

34.0%

Source: EBRI tabulations of the 1976-2011 Current Population Survey.


Percentage of Income Attributable to Pension Income for Those Age 65 or Older, 1975-2010

1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 201012%

13%

14%

15%

16%

17%

18%

19%

20%

21%

14.4%

14.6%

14.8%

15.3%

15.8%

15.6%

16.9%

17.4%

19.0%

20.0%

18.8%

19.0%

18.5%

19.5% 19.8%

18.2%

18.7%

18.4%

18.4%

Source: EBRI tabulations of the 1976-2011 Current Population Survey.


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Provision of Retiree Health Benefits for Current and All Future Retirees,Employers with 500+ Employees, 1993-2001

29%23%

31%

46% 43% 41% 40% 38% 36% 35%

24%28%30%31%33%35%40%40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Early Retirees Medicare-Eligible Retirees

Source: Mercer Human Resource Consulting.


Percentage of Workers Expecting Retiree Health Benefits, by Age and Retirement Experience, 1997-2010

15

45-64, never retired 65+, never retired 45-64, ever retired 65+, ever retired0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

45%

23%

33%

11%

43%

27%

33%

15%

36%

22%

27%

11%

32%

21%

28%

9%

1997 2002 2005 2010

Source: Employee Benefit Research Institute estimates based on data from the Survey of Income and Program Participation, 1996, 2001, 2004, and 2008 panels.


16

Retirement Income Sources of the Future


17

Approximations Of Relative Benefits From DB and DC Plans Suggest That Both Can Be Valuable Additions To Social Security – Automatic Enrollment Is Of Major Value – For The Lowest Income Workers To Do Well With DC Requires Automatic Enrollment


1–10 11–20 21–30 31–40

DC, Lowest 0 0 0.02228 0.09158

DB, Lowest 0.0237241124260355 0.111797337278107 0.27918823964497 0.414626479289941

DC, Highest 0.02142 0.1771 0.30486 0.47296

DB, Highest 0.0272004437869823 0.135271819526627 0.283700073964497 0.413674186390533

3%

8%

13%

18%

23%

28%

33%

38%

43%

48%

Employees Currently Ages 25–29:Median Replacement Rates from Voluntary Enrollment 401(k) vs. Styl-ized Final Average Defined Benefit Plan (1.5%, High Three) as a Func-

tion of Salary Quartile and Number of Years Eligible

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4.Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).


1–10 11–20 21–30 31–40

DC, Lowest 0 0.169244322631167 0.340610023492561 0.601041503523884

DB, Lowest 0.0237241124260355 0.111797337278107 0.27918823964497 0.414626479289941

DC, Highest 0.0366836335160533 0.224238057948316 0.414513703993735 0.667716523101018

DB, Highest 0.0272004437869823 0.135271819526627 0.283700073964497 0.413674186390533

5%

15%

25%

35%

45%

55%

65%

75%

Employees Currently Ages 25–29:Median Replacement Rates from Automatic Enrollment 401(k) vs. Styl-ized Final Average Defined Benefit Plan (1.5%, High Three) as a Func-


Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205a4 and 120105a4 Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).


1–10 11–20 21–30 31–40

DC, Lowest 0 0.103323414252153 0.221965544244323 0.35505090054816

DB, Lowest 0.0237241124260355 0.111797337278107 0.27918823964497 0.414626479289941

DC, Highest 0.0226131558339859 0.136409553641347 0.253008613938919 0.383460454189507

DB, Highest 0.0272004437869823 0.135271819526627 0.283700073964497 0.413674186390533

3%

8%

13%

18%

23%

28%

33%

38%

43%

Employees Currently Ages 25–29:Median Replacement Rates from Automatic Enrollment 401(k) vs. Stylized

Final Average Defined Benefit Plan (1.5%, High Three) as a Function of Salary Quartile and Number of Years Eligible: Alternative (Lower) Return

Scenario

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205a4 and 120105a4alt.Returns are based on a stochastic process with means of 4.45% Equity and 3.8% Fixed Income (nominal).


1–10 11–20 21–30 31–40

DC, Lowest 0 0 0.02228 0.09158

DB, Lowest 0.03233 0.0909 0.14348 0.23388

DC, Highest 0.02142 0.1771 0.30486 0.47296

DB, Highest 0.02678 0.08608 0.14607 0.23783

3%

8%

13%

18%

23%

28%

33%

38%

43%

48%

Employees Currently Ages 25–29:Median Replacement Rates from Voluntary Enrollment 401(k) vs Styl-ized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Func-


Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4cb.Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are based on a stochastic process with a mean of 6.3% (nominal).


1–10 11–20 21–30 31–40

DC, Lowest 0 0.169244322631167 0.340610023492561 0.601041503523884

DB, Lowest 0.03233 0.0909 0.14348 0.23388

DC, Highest 0.0366836335160533 0.224238057948316 0.414513703993735 0.667716523101018

DB, Highest 0.02678 0.08608 0.14607 0.23783

5%

15%

25%

35%

45%

55%

65%

75%

Employees Currently Ages 25–29:Median Replacement Rates from Automatic Enrollment 401(k) vs Styl-ized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Func-


Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4.Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are based on a stochastic process with a mean of 6.3% (nominal).


23

Attitudes Are Getting More Realistic

Far More Savings Has Been – And Is - Needed


24

Early Boomers Late Boomers Gen Xers

EBRI 2003 RRR 0.51721 0.48478 0.51723

EBRI 2012 RRR 0.443 0.433 0.439

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

EBRI Retirement Readiness RatingTM (RRR): 2003 vs. 2012 (Status Quo for Social Security, Housing Equity Used "As Needed")

Percentage of population at risk* for inadequate retirement income, by age cohort (baseline assumptions)

Sources: EBRI Retirement Security Projection Model® versions 1501 and 1502. * See text for definition of "at risk"


25

Early Boomers Late Boomers Gen Xers

Lowest income quartile 0.86766 0.83602 0.77654

2 0.48001 0.4691 0.45802

3 0.2932 0.26457 0.29304

Highest income quartile 0.12451 0.11224 0.16694

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

Sources: EBRI Retirement Security Projection Model® versions 1501 and 1502. * See text for definition of "at risk"

EBRI Retirement Readiness RatingTM (RRR): 2012 (Status Quo for Social Security, Housing Equity Used "As Needed")

Percentage of population at risk* for inadequate retirement income, by age cohort and income quartile (baseline assumptions)


26

0 1-9 10-19 20+0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

60.7%

41.1%

30.6%

18.2%

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 retirementexpenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance andout‐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, IRAsand/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‐sumdistribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis forreplacement rates, standard‐of‐living and other thresholds.Source: EBRI Retirement Security Projection Model,® Version 120201.


It Is Important To Look At Both DC and IRA Balances

27


28

25-34 35-44 45-54 55-64 65-740%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Composition of combined 401(k) and IRA balances by age.Analysis limited to individuals with both 401(k) and IRA

balances at the end of 2008

non-rollover IRA

rollover

401(k)

111209c

Source: EBRI DC/IRA Database


It Is Important To Look At Both DC and IRA Balances When Considering Retirement Income Adequacy –

This has led to a rush of products to provide comprehensive planning using all assets and liabilities, the addition to managed accounts of lifetime income payout approaches, and the use of financial planners.

29


Longevity “Risk” “Reward”

Probability of a Healthy 65-year-old Living to Various Ages

0

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105

MaleFemaleAt least one spouse

Age

Pro

babi

lity

85 88 9250% chance

25% chance92 94 97

Source: Annuity 2000 Mortality Tables.

The most significant risk that retirees face is longevity risk – the risk of outliving their assets. This risk is not hedged by traditional investment strategies.


31

Income Distribution of those age 65 and older in 2010 - $ to achieve 100% income replacement with annuity purchase versus alternative income streams at noted deterministic rate of return with 95% probability of success.

Percentile Income SS % Not SS IMA.com $ 3%RR7%WRR

10% $6,159 80% $1,231 18K 27K 17K

25% $10,757 92%$860 12.5K 19K 12K

50% $18,000 84%$2,880 42K 63K 40K

75% $33,600 57%$14,448 210K 325K 199K

90% $61,357 30%$42,949 624K 965K 590K

95% $89,102 19%$72,172 1.05M 1.6M 1M

14.4 % had income of $50,000 or more.

IMA.com quotes on 9/13/2011 for female age 65 in GA – not inflation indexed – no guaranteed period – no survivor benefit


32


33

PAYABLE Monthly Benefit Levels as Percent of Career-

Average Earnings by Year of Retirement at age 62

0

10

20

30

40

50

60

70

1960 1980 2000 2020 2040 2060 2080

Low Earner ($19,388 in 2010; 25th percentile)

Medium Earner ($43,084 in 2010; 56th percentile)

High Earner ($68,934 in 2010; 81st percentile)Max Earner ($106,800 in 2010; 100th percentile)

Source: 2010 OASDI Trustees Report


34

26-35 36-45 46-55 56-650%

2%

4%

6%

8%

10%

12%

14%

16%

Average Percentage Reductions in 401(k) Account Balances at Social Security NRA 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.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 eli-gible 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 as-sumes no job turnover, withdrawals or loan defaults. The full stochastic nature of the model will be included in future analysis.* Normal retrmeent age.

Age

Salary Quartile9.8%

%15.1%


35

Issues of the Day:

Public Social Security: Is 78% Enough?(Current Sustainable Benefit With No Reform)

Employer DC and Individual Retirement Savings: “Leakage”


36

Workers Having Saved Money for Retirement, by Household Income

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2009-2013 Retirement Confidence Surveys.

49%

80%

93%

24%

76%

94%2009 2013

Workers withHousehold Income

<$35,000

Workers withHousehold Income$35,000-$74,999

Workers withHousehold Income

$75,000+


Definitely could

Probably could

Probably could not

Definitely could not

Don't know / Refused

50%

20%

12%

16%

1%

52%

17%

6%

22%

4%

Retirees Workers

Ability to Come up With $2,000 if an Unexpected Need Arose Within the Next Month

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2013 Retirement Confidence Survey.

37


38Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1994-2013 Retirement Confidence Surveys.

2011 2012 2013

34%

34%31%

33%

22%25%

Workers

Americans Reporting They Dipped into Savings to Pay for Basic Expenses


39

Issue of the Day: Coverage and Participation

Voluntary vs. Mandatory vs. Employee Opt Out


40

Issue of the Day: Life Time Income or ?


41

Issue of the Day: How Much Do I Really Have to Save?

Constant Confusion of % Needed for 40 Years

Versus

My Age Specific Percentage


42

Total Savings and Investment Reported by Workers,Among Those Providing a Response

(not including value of primary residence or defined benefit plans)

2003 2008 2009 2010 2011 2012 2013

Less than $1,000

55%36%

20% 27% 29% 30% 28%

$1,000 - $9,999 19 16 17 18 18

$10,000 - $24,999 13 13 11 10 12 11

$25,000 - $49,999 15 12 11 12 11 10 9

$50,000 - $99,999 11 12 12 11 9 10 10

$100,000 - $249,999

11 15 12 11 14 11 12

$250,000 or more 7 12 12 11 10 10 12



43

2003 2008 2009 2010 2011 2012 2013

Less than $1,000

54%51%

23% 27% 28% 28% 31%

$1,000 - $9,999 17 15 14 19 16

$10,000 - $24,999 9 16 14 12 8 8

$25,000 - $49,999 9 9 13 11 6 9 9

$50,000 - $99,999 11 6 9 6 11 8 9

$100,000 - $249,999

13 13 10 15 12 12 10

$250,000 or more 12 12 12 12 17 15 17


Total Savings and Investment Reported by Retirees,Among Those Providing a Response

(not including value of primary residence or defined benefit plans)


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45

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