1. Plug the Drain: 401(k) Leakage and the Impact on
Retirement
DCIIA Webinar
Jack VanDerhei
Research Director
Employee Benefit Research Institute
February 10, 2012
vanderhei@ebri.org
1

2. Key points from today’s presentation
• The impact of 401(k) leakages on retirement needs to be evaluated
differently for automatic and voluntary enrollment
• Voluntary enrollment
• Cash out behavior and preretirement withdrawals have a significant impact
• Especially for lower income quartile
• Loans change median replacement rates by less than ½ percentage point
• Does not include loan defaults
• Automatic enrollment
• Lowest income quartile (with at least thirty years of eligibility)
• Cashouts will decrease probability of success by 5 percentage points
• Loans will only decrease probability of success by 1 percentage point
• Cashouts, hardship withdrawals (w 6 month suspension) and loans together decrease
probability of success by 6.1 percentage points
• Approximately equal to a 5 year delay in participation
• Highest income quartile (with at least thirty years of eligibility)
• Much more difficult to reach success threshold given the PIA formula in Social Security
• Cashouts, loans and hardship withdrawals have approximately the same impact as for
lowest income quartile
• However, the impact of delaying is much more significant for this group
2

3. Impact of Leakages on Voluntary Enrollment 401(k) Plans:
2002 assumptions
Change in median replacement rates from 401(k) “accumulations” relative to
baseline model for participants reaching age 65 between 2030 and 2039
Percentage Points
Highest income Lowest income
4.7
Never cash out balance at job change
13.3
Preretirement withdrawals are never taken 3.8
from 401(k) plan 6.7
0.3
Loans are never taken from 401(k) plan
0.4
*Median replacement rates = 50.7 and 67.2 percent for lowest and
highest income quartiles respectively. 3
Source: Holden and VanDerhei (2002).

4. Success* Rates of Achieving a Combined 80% Real Replacement
Rate From Social Security and 401(k) Accumulations,
as a Function of Maximum Employee Contributions
90%
80%
70%
60%
Probability
50%
40%
30%
20%
10%
0%
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%
Maximum Employee Contributions
Source: EBRI/ERF Retirement Security Projection Model, versions 100810a1–100810a16.
* "Success" is defined as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations
combined as defined in VanDerhei and Lucas (2010). The population simulated consists of workers currently ages 25–29
who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. 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.
4

5. Impact of Leakages for Automatic Enrollment Plans: Lowest
Income Quartile
Percentage point decrease in probability of success* from various forms of
leakages and participant behavior: under the all-optimistic auto feature
assumptions
No leakages (82.9% prob. of success) 0.0%
Cashouts 5.1%
Hardship Withdrawals (HW) 1.9%
HW and 6 month suspension 2.5%
HW and 24 month suspension 3.7%
Loans, fixed income first, no defaults 1.0%
Cashouts, HW 6 month, Loans 6.1%
Cashouts, HW 6, Loans (w defaults) 7.1%
Delay = 1 year 0.6%
Delay = 5 years 5.9%
Source: EBRI Retirement Security Projection Model, version 120209.
* "Success" is defined as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations
combined as defined in VanDerhei and Lucas (2010). The population simulated consists of workers currently ages 25–29 5
who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. 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.

6. Impact of Leakages for Automatic Enrollment Plans:
Highest Income Quartile
Percentage point decrease in probability of success* from various forms of
leakages and participant behavior: under the all-optimistic auto feature
assumptions
No leakages (65.2% prob. of success) 0.0%
Cashouts 4.7%
Hardship Withdrawals (HW) 2.1%
HW and 6 month suspension 2.7%
HW and 24 month suspension 5.0%
Loans, fixed income first, no defaults 1.2%
Cashouts, HW 6 month, Loans 6.3%
Cashouts, HW 6, Loans (w defaults) 8.2%
Delay = 1 year 2.1%
Delay = 5 years 14.1%
Source: EBRI Retirement Security Projection Model, version 120209.
* "Success" is defined as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations
combined as defined in VanDerhei and Lucas (2010). The population simulated consists of workers currently ages 25–29 6
who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. 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.

7. Appendix: Brief Chronology of the EBRI
Retirement Security Projection Model®
• 2001, Oregon
• 2009, Pension Research Council
o Simulated retirement wealth vs. ad hoc thresholds
for retirement expenses o Winners/losers analysis of defined benefit
freezes and enhanced defined contribution
• 2002, Kansas and Massachusetts employer contributions provided as a quid
o Full stochastic retiree model: Investment and pro quo
Longevity risk, Nursing home and home health care • 2010, EBRI Issue Brief (April)
costs
o Impact of modification of employer
o Net housing equity contributions when they convert to automatic
• 2003, National model enrollment for 401(k) plans
o Expanded to full national sample o 2010, EBRI Issue Brief (July)
• 2004, Senate Aging testimony (January) o Updated model to 2010, included automatic
o Impact of everyone saving another 5 percent of enrollment for 401(k) plans
compensation o 2010, EBRI Notes (September)
• 2004, EBRI Policy forum (May) o Analyzes how eligibility for participation in a
o Impact of annuitizing defined contribution/IRA DC plan impacts retirement income
balances adequacy
• 2006, EBRI Issue Brief (March) o 2010, EBRI Notes (October)
o Evaluation of defined benefit freezes on participants o Computes Retirement Savings Shortfalls for
• 2006, EBRI Issue Brief (September) Boomers and Gen Xers
o Converted into a streamlined individual version for o 2010, Senate HELP testimony (October)
the ballpark estimate Monte Carlo o Analyzes the relative importance of
employer-provided retirement benefits and
• 2008, EBRI policy forum (May)
Social Security
o Impact of converting 401(k) plans to automatic
enrollment o 2010, EBRI Issue Brief (November)
o The Impact of Auto-enrollment and
Automatic Contribution Escalation on
Retirement Income Adequacy

8. Appendix (continued)
o 2011, February EBRI Issue Brief o 2012, Urban Institute Presentation
o Analyzes the impact of the 2008/9 crisis (February)
in the financial and real estate markets o Updates RSPM to 2012
on retirement income adequacy o Analyzes whether Boomer and Gen X
o 2011, EBRI policy forum (May) women will be able to afford
o Analyzes impact of deferring retirement retirement at age 65
age o 2012, March EBRI Notes article
o 2011, July EBRI Notes article o Analyzes employer and employee
o Analyzes the impact of the 20/20 limit reaction to proposal to modify tax
recommended by the National incentives for defined contribution
Commission on Fiscal Responsibility plans and simulates the expected
and Reform impact on account balances at
o 2011, August EBRI Notes article retirement age
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
8

9. 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
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
100 105 110 115 120 125 130 135 140 145
15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%
% % % % % % % % % %
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%
Combined Real Replacement Rate
Source: EBRI Retirement Security Projection Model, versions 100810a1–100810a16.
* Cumulative distribution functions.
9

10. References
• Holden, Sarah and Jack VanDerhei. (2002). Can 401(k)
Accumulations Generate Significant Income for Future Retirees?.
EBRI Issue Brief and ICI Perspective
• VanDerhei, Jack and Lori Lucas, The Impact of Auto-enrollment and
Automatic Contribution Escalation on Retirement Income
Adequacy, November 2010 EBRI Issue Brief #349
10