This document summarizes a presentation on key information for designing and consulting on DC retirement plans. It includes:
- An overview of trends in asset allocation, target date funds, company stock concentration, and plan design features like automatic enrollment and default contribution rates.
- A description of the EBRI/ICI 401(k) database containing administrative records on millions of 401(k) plan participants and trillions in assets.
- Data on average asset allocation in 401(k) accounts by age, showing increasing allocation to target date funds.
- Findings that recently hired 401(k) participants tend to hold high concentrations of target date funds or balanced funds.
- Analysis of how automatic enrollment
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2013: DC Plan Member Behavior—Key Information for Better Design and Consulting
1. SESSION/SÉANCE :
Session 34 • DC Plan Member Behavior—Key Information for Better Design
and Consulting
SPEAKER(S)/CONFÉRENCIER(S) :
Jack L. VanDerhei, Ph.D.
Research Director
Employee Benefit Research Institute
vanderhei@ebri.org
2. ® Employee Benefit Research Institute 2013® Employee Benefit Research Institute 2013
Key points from today’s presentation
• Asset allocation
• Background
• Impact of target date funds
• Trends in company stock concentration
• Plan design
• Automatic enrollment
• Default rates
• Leakages
• Move to once a year employer contributions
• Retirement Security Projection Model®
• Retirement Readiness Ratings
• Retirement Savings Shortfalls
• Other
• Value of a financial advisor
• Impact of low interest rate environment
3. ® Employee Benefit Research Institute 2013
EBRI/ICI 401(k) database
•Annual administrative records from a number of EBRI
members since 1996
– As of year-end 2011:
• 24 million 401(k) plan participants, in
• 64,000 employer-sponsored 401(k) plans, holding
• $1.4 trillion in assets.
– Database is longitudinal
• Started developing “consistent sample” in 1999 to counter the bias
inherent in simply reporting cross-sectional averages.
– Database can now be tracked across data providers
• Extremely secure standardized encryption algorithm.
• Allows us to combine 401(k) accounts across existing and former
plan/provider combinations.
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11. ® Employee Benefit Research Institute 2013
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
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6% 9% 12% 15%
Lowest, Optimist
ic 48.9% 64.2% 73.5% 79.2%
Highest, Optimis
tic 28.9% 41.0% 53.0% 64.0%
Lowest, Pessimi
stic 45.7% 56.4% 61.0% 62.1%
Highest, Pessim
istic 27.0% 34.1% 38.8% 41.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Probability
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. 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.
12. ® Employee Benefit Research Institute 2013® Employee Benefit Research Institute 2013
The impact of increasing the default contribution rate
to 6% for AE plans with auto escalation of contributions
• A plan design often suggested as a way to improve retirement income
adequacy for 401(k) participants is increasing the initial default deferral
rate.
• Under a set of specified behavioral assumptions, 25.6 percent of those in
the lowest-income quartile who had previously NOT been successful
under actual default contribution rates were found to be successful as a
result of the change in deferral percentage.
• When employees in the highest-income quartile were analyzed under the
same set of assumptions, the percentage of those who had NOT
previously been successful (under the actual default contribution rates)
that now ARE successful as a result of the change in deferral rate was 18.4
percent
Source: VanDerhei, Jack (September 2012) Increasing Default
Deferral Rates in Automatic Enrollment 401(k) Plans: The
Impact on Retirement Savings Success in Plans With Automatic
Escalation, EBRI Notes
13. ® Employee Benefit Research Institute 2013
Impact of Leakages on Voluntary Enrollment 401(k)
Plans: 2002 assumptions
0.4
6.7
13.3
0.3
3.8
4.7
Loans are never taken from 401(k) plan
Preretirement withdrawals are never taken from
401(k) plan
Never cash out balance at job change
Percentage Points
Highest income Lowest income
1
Change in median replacement rates from 401(k) “accumulations” relative to baseline
model for participants reaching age 65 between 2030 and 2039
*Median replacement rates = 50.7 and 67.2 percent for
lowest and highest income quartiles respectively.
Source: Holden and VanDerhei (2002).
14. ® Employee Benefit Research Institute 2013
Impact of Leakages for Automatic Enrollment Plans:
Lowest Income Quartile
0.0%
5.1%
1.9%
2.5%
3.7%
1.0%
6.1%
7.1%
0.6%
5.9%
No leakages (82.9% prob. of success)
Cashouts
Hardship Withdrawals (HW)
HW and 6 month suspension
HW and 24 month suspension
Loans, fixed income first, no defaults
Cashouts, HW 6 month, Loans
Cashouts, HW 6, Loans (w defaults)
Delay = 1 year
Delay = 5 years
1
Percentage point decrease in probability of success* from various forms of leakages and
participant behavior: under the all-optimistic auto feature assumptions
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 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.
15. ® Employee Benefit Research Institute 2013
Impact of Leakages for Automatic Enrollment Plans:
Highest Income Quartile
0.0%
4.7%
2.1%
2.7%
5.0%
1.2%
6.3%
8.2%
2.1%
14.1%
No leakages (65.2% prob. of success)
Cashouts
Hardship Withdrawals (HW)
HW and 6 month suspension
HW and 24 month suspension
Loans, fixed income first, no defaults
Cashouts, HW 6 month, Loans
Cashouts, HW 6, Loans (w defaults)
Delay = 1 year
Delay = 5 years
1
Percentage point decrease in probability of success* from various forms of leakages and
participant behavior: under the all-optimistic auto feature assumptions
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 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.
17. ® Employee Benefit Research Institute 2013
EBRI’s Retirement Security Projection Model®
•Accumulation phase
• Simulates retirement income/wealth for Boomers and Gen Xers from defined
contribution, defined benefit, IRA, Social Security and net housing equity
• Pension plan parameters coded from a time series of several hundred plans.
• 401(k) asset allocation and contribution behavior based on individual administrative
records
o Annual linked records dating back to 1996
o More than 24 million employees in 60,000 plans.
•Retirement phase
• Simulates 1,000 alternative life-paths for each household starting at 65
• Deterministic modeling of food, apparel and
services, transportation, entertainment, reading and education, housing, and basic health
expenditures.
• Stochastic modeling of longevity risk, investment risk, nursing facility care and home
based health care.
•Produces a Retirement Readiness Rating™
• Percentage of simulated life-paths that do NOT run short of money in retirement
1
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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 (March 2012). Testimony before the Senate Banking Committee, on "Retirement
(In)security: Examining the Retirement Savings Deficit"
•VanDerhei (April 2012), Tax Reform and Tax‐Favored Retirement Accounts,” Testimony for
the House Committee on Ways and Means.
•VanDerhei (September 2012). Increasing Default Deferral Rates in Automatic Enrollment
401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation.
EBRI Notes
•VanDerhei (June 2013). What a sustained low-yield rate environment means for retirement
income adequacy: Results from the 2013 EBRI Retirement Security Projection Model® EBRI
Notes
•VanDerhei, J., Copeland, C. (July 2010). The EBRI Retirement Readiness Rating:™ Retirement
Income Preparation and Future Prospects. EBRI Issue Brief.
•VanDerhei, Holden, Alonso and Bass (December 2012), “401(k) Plan Asset
Allocation, Account Balances, and Loan Activity in 2011.” EBRI Issue Brief and ICI Perspective
•VanDerhei and Lucas (November 2010), The Impact of Auto-enrollment and Automatic
Contribution Escalation on Retirement Income Adequacy, EBRI Issue Brief
2
29. ® Employee Benefit Research Institute 2013
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
o2010, EBRI Issue Brief (July)
o Updated model to 2010, included automatic
enrollment for 401(k) plans
o2010, EBRI Notes (September)
o Analyzes how eligibility for participation in a DC
plan impacts retirement income adequacy
o2010, EBRI Notes (October)
o Computes Retirement Savings Shortfalls for
Boomers and Gen Xers
o2010, Senate HELP testimony (October)
o Analyzes the relative importance of employer-
provided retirement benefits and Social Security
o2010, EBRI Issue Brief (November)
o The Impact of Auto-enrollment and Automatic
Contribution Escalation on Retirement Income
Adequacy
30. ® Employee Benefit Research Institute 2013
Appendix (continued)
2011, February EBRI Issue Brief
• Analyzes the impact of the 2008/9 crisis in the
financial and real estate markets on retirement
income adequacy
2011, EBRI policy forum (May)
• Analyzes impact of deferring retirement age
2011, July EBRI Notes article
• Analyzes the impact of the 20/20 limit
recommended by the National Commission on
Fiscal Responsibility and Reform
2011, August EBRI Notes article
• Analyzes value of defined benefit plans
2011, Senate Finance Hearing (September)
• Analyzes the impact of modifying tax incentives for
defined contribution plans
2012, Urban Institute Presentation (February)
• Analyzes whether Boomer and Gen X women will
be able to afford retirement at age 65
2012, March EBRI Notes article
• 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
2012, June EBRI Notes article
• Analyzes the impact of eligibility for participation in
a 401(k) plan on Gen Xers
August 2012 EBRI Notes article
• Provided additional evidence on whether deferring
retirement to age 70 would provide retirement
income adequacy for the vast majority of Baby
Boomers and Gen Xers.
September 2012 EBRI Notes article
• Analyzed the impact of increasing the default
contribution rate for automatic enrollment 401(k)
plans with automatic escalation of contributions.
November 2012 EBRI Notes article
• Reclassified the RRRs to provide additional
information on those substantially above the
threshold; close to the threshold; and substantially
below the threshold
March 2013 EBRI Notes article
• Quantifies the value of financial advisors and the
use of online calculators for estimating adequate
retirement targets
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