Retirement Savings Trends

Dallas L. Salisbury President and CEO Employee Benefit Research Institute June 11, 2012 salisbury@ebri.org

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Employee Benefit Research Institute 2012

DC 1974 Pre ERISA, DOL and PBGC Age 24

38 Years of Retirement Research and Policy Analysis

EBRI Founding 1978 .34 Years and Counting at EBRI..Age 62

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Employee Benefit Research Institute 2012

Annuity DB to LSD DB to Hybrid LSD DB to LSD DC

Spend More on No Risk One Year Promise 3 + Move Cost and Risk to Employee (inflation, investment, longevity)
Employee Benefit Research Institute 2012

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).

Employee Benefit Research Institute 2012

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Employee Benefit Research Institute 2012

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Employee Benefit Research Institute 2012

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

1% 1% 1% 1%

* 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.

Percentage of Private Sector Workers Participating in an Employment-Based Retirement Plan by Plan Type, 1979-2009*
35%
30% 25% 20% 15% 10% 5% 0% DB only DC only Both

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

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Employee Benefit Research Institute 2012

Turnover With Non-Preservation Affect Results Dramatically

Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039 (percent of final five-year average salary)
Baseline Don't always have a 401(k) 67.2 50.7 27.5 23.2 23.2 54.0 59.5

30.8
24.7

34.7
27.7

39.4

Income Quartile at Age 65

Employee Benefit Research Institute 2012

Male Prime-Age (25-64) Workers Median Tenure Trends, By Age, 1951-2010 (High Mobility)
18 Ages 25-34 16 14
Years of Tenure
15.3 14.7 13.0 14.5 14.6 14.5 13.4 11.2 10.5 11.8 11.2 10.1 9.4 6.9 6.7 6.0 4.5 3.5 2.8 2.7 3.2 2.7 3.2 3.1 3.1 3.0 2.8 2.7 2.8 3.0 2.9 2.8 3.2 7.0 6.5 6.1 5.5 5.3 5.0 5.1 5.3 9.5 9.1 10.2 10.2 9.8 9.6 8.1 7.6 7.3 8.2 8.5 9.5 10.1 10.4

Ages 35-44 Ages 45-54 Ages 55-64

12 10 8 6 4 2 0
7.6 9.3 11.4 8.8 11.5 11.0

12.8

5.2

5.2

1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the MonthlyYear Review (September 1952, October 1963, January 1967, Labor 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.

Employee Benefit Research Institute 2012

Female Prime-Age (25-64) Workers Median Tenure Trends, by Age, 1951-2010 (High Mobility)
12 Ages 25-34 Ages 35-44 Ages 45-54 10 Ages 55-64 8.8 7.8 8 9.0 8.5 9.2 9.8 9.7 9.9 10.0 9.6 9.9 9.6 9.2 9.8 9.7

Years of Tenure

6 4.5 4 4.0 3.6 2 3.1 1.8 0 1951 1963 1966 1973 1978 2.0 3.5 1.9 3.6 2.2 1.6 3.6 6.1 5.7 5.9 5.9

6.8 6.3

6.7

7.0

7.2

7.3 6.5 6.4

6.7

7.0

7.1

4.8 4.1 2.8 4.4 2.6 4.5 2.7 2.7 2.5 2.5 2.5 4.5 4.3 4.2 4.5 2.8

4.6

4.7

4.9

2.8

2.6

3.0

1983

1987

1991

1996

1998

2000

2002

2004

2006

2008

2010

Year

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.

Employee Benefit Research Institute 2012

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

40% 38% 37.7% 37.5% 36.4% 35.0% 35.3% 34.6% 35.9% 34% 32% 35.6% 35.0% 35.0% 35.5% 34.0% 35.0%

36%

30.3%
30% 28% 26% 24% 22% 1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010 27.3% 31.5%

25.0%
25.5%

27.4%

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

Employee Benefit Research Institute 2012

Percentage of Income Attributable to Pension Income for Those Age 65 or Older, 1975-2010
21% 20.0% 20% 19.0% 19% 18.8% 19.0% 18.7% 18.4% 19.5% 19.8%

18%
16.9% 17% 16% 15% 14% 14.8% 14.4% 14.6% 15.8% 17.4%

18.5%

18.2%

18.4%

15.3%

15.6%

13%
12% 1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010

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

Employee Benefit Research Institute 2012

Provision of Retiree Health Benefits for Current and All Future Retirees, Employers with 500+ Employees, 1993-2001
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001
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Employee Benefit Research Institute 2012

Early Retirees

Medicare-Eligible Retirees

46% 40%

43% 40%

41% 35%

40% 33%

38% 31%

36% 30%

35% 28%

31% 24% 29% 23%

Source: Mercer Human Resource Consulting.

Percentage of Workers Expecting Retiree Health Benefits, by Age and Retirement Experience, 1997-2010
50% 45% 45% 40% 43% 1997 2002 2005 2010

36% 35%
30% 25% 20% 23% 32% 27% 22% 33% 33% 28%

27%

21%

15%
15% 11% 10% 5% 0% 45-64, never retired 65+, never retired 45-64, ever retired 65+, ever retired 11% 9%

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

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Employee Benefit Research Institute 2012

Retirement Income Sources of the Future

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Employee Benefit Research Institute 2012

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

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Employee Benefit Research Institute 2012

Employees Currently Ages 2529: Median Replacement Rates from Voluntary 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
50% 45% 40% 35% 30% 25% 20% 15% 10%

5%
0% 110 0% 2% 2% 3% 1120 0% 11% 18% 14% 2130 2% 28% 30% 28% 3140 9% 41% 47% 41%

DC, Lowest DB, Lowest DC, Highest DB, Highest

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).

Employee Benefit Research Institute 2012

Employees Currently Ages 2529: 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
80% 70% 60% 50% 40% 30% 20%

10%
0%

DC, Lowest DB, Lowest DC, Highest DB, Highest

110 0% 2% 4% 3%

1120 17% 11% 22% 14%

2130 34% 28% 41% 28%

3140 60% 41% 67% 41%

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).

Employee Benefit Research Institute 2012

Employees Currently Ages 2529: 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
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

DC, Lowest DB, Lowest DC, Highest DB, Highest

110 0% 2% 2% 3%

1120 10% 11% 14% 14%

2130 22% 28% 25% 28%

3140 36% 41% 38% 41%

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).

Employee Benefit Research Institute 2012

Employees Currently Ages 2529: Median Replacement Rates from Voluntary Enrollment 401(k) vs Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Function of Salary Quartile and Number of Years Eligible
50% 45% 40% 35% 30% 25% 20% 15% 10%

5%
0% 110 0% 3% 2% 3% 1120 0% 9% 18% 9% 2130 2% 14% 30% 15% 3140 9% 23% 47% 24%

DC, Lowest DB, Lowest DC, Highest DB, Highest

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).

Employee Benefit Research Institute 2012

Employees Currently Ages 2529: Median Replacement Rates from Automatic Enrollment 401(k) vs Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Function of Salary Quartile and Number of Years Eligible
80% 70% 60% 50% 40% 30% 20%

10%
0%

DC, Lowest DB, Lowest DC, Highest DB, Highest

110 0% 3% 4% 3%

1120 17% 9% 22% 9%

2130 34% 14% 41% 15%

3140 60% 23% 67% 24%

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

Employee Benefit Research Institute 2012

Attitudes Are Getting More Realistic

Far More Savings Has Been And Is - Needed

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Employee Benefit Research Institute 2012

Impact of Income and Relative Value of Defined Benefit Accrual at Retirement Age on At-Risk* Probabilities
Percentage of population at risk for inadequate retirement income, by age-specific remaining career income quartiles and income-specific defined benefit value quartiles (baseline assumption)
90%

80%

Percentage At Risk of Inadequate Retirement Income

Income-specific Defined Benefit

No DB accruals Lowest Quartile

70%

60%

2 3

50%

Highest Quartile

40%

30%

20%

10%

0% Lowest 2 Income Quartile 3 Highest

Source: EBRI/ERF Retirement Security Projection Model version 110714e. * An individual or family 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 (in some cases) net housing equity (either in the form of an annuity or as 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 ad hoc thresholds.
.

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Employee Benefit Research Institute 2012

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)
100.0% 90.0% 80.0% 70.0% 60.0%

50.0%
40.0% 30.0% 20.0% 10.0% 0.0% EBRI 2003 RRR EBRI 2012 RRR Early Boomers 51.7% 44.3% Late Boomers 48.5% 43.3% Gen Xers 51.7% 43.9%

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

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Employee Benefit Research Institute 2012

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)
100.0%
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Lowest income quartile 2 3 Highest income quartile Early Boomers 86.8% 48.0% 29.3% 12.5% Late Boomers 83.6% 46.9% 26.5% 11.2% Gen Xers 77.7% 45.8% 29.3% 16.7%

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

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Employee Benefit Research Institute 2012

Impact of future years of 401(k) eligibility on 2012 atrisk* ratings for Gen Xers
70.0% 60.7% 60.0%

50.0% 41.1% 40.0% 30.6% 30.0%

20.0%

18.2%

10.0%

0.0% 0 1-9 10-19 Future years of 401(k) eligibility 20+

*An individual is considered to be atrisk 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 outofpocket healthrelated 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 lumpsum distribution scenario is chosen), and net housing equity ( in the form of a lumpsum 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, standardofliving and other thresholds. Source: EBRI Retirement Security Projection Model, Version 120201.

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Employee Benefit Research Institute 2012

Average account balances for 401(k) participants 55-64 with at least thirty years of tenure
$300,000.00

$290,000.00

$280,000.00

$270,000.00

$260,000.00

$250,000.00

$240,000.00

$230,000.00 average

12/31/2010 $255,074.90

12/31/2011 estimated $272,680.81

3/31/2012 estimated $292,258.22

Sources: 2010 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2011 and 2012 Account Balances: EBRI estimates. The analysis is based on all participants with account

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Employee Benefit Research Institute 2012

Estimated percentage of consistent participants who have more money in their 401(k) accounts on 6/5/12 than at 10/9/07, by age and tenure
100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 1-4 5-9 10-19 20-29 30+ 26-35 99.0% 96.7% 93.9% 36-45 98.6% 96.2% 91.0% 85.3% 46-55 98.5% 96.1% 90.8% 85.0% 85.4% 56-65 98.0% 95.0% 89.3% 84.0% 83.3%

Sources: EBRI estimates based on EBRI/ICI ParticipantDirected Retirement Plan Data Collection Project.
Employee Benefit Research Institute 2012

It Is Important To Look At Both DC and IRA Balances

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Employee Benefit Research Institute 2012

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
100% 90% 80% 70% 60% non-rollover IRA 50% 40% 30% 20% 10% 0% 25-34 35-44 45-54 55-64 65-74 rollover 401(k)

111209c

Source: EBRI DC/IRA Database

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Employee Benefit Research Institute 2012

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.

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Employee Benefit Research Institute 2012

Longevity Risk Reward

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. Probability of a Healthy 65-year-old Living to Various Ages 100% Male Female At least one spouse 50% chance 50%
85
88

75%
Probability

92

25% chance 25%

92 94 97

0 65

70

75

80

85 Age

90

95

100

105

Source: Annuity 2000 Mortality Tables.

Employee Benefit Research Institute 2012

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

10% 25% 50% 75% 90% 95%

Income $6,159 $10,757 $18,000 $33,600 $61,357 $89,102

SS % 80% 92% 84% 57% 30% 19%

Not SS $1,231 $860 $2,880 $14,448 $42,949 $72,172

IMA.com $ 18K 12.5K 42K 210K 624K 1.05M

3%RR 27K 19K 63K 325K 965K 1.6M

7%WRR 17K 12K 40K 199K 590K 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
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Employee Benefit Research Institute 2012

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Employee Benefit Research Institute 2012

PAYABLE
70 60 50 40 30

Monthly Benefit Levels as Percent of Career-

Average Earnings by Year of Retirement at age

62

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

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

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Max Earner ($106,800 in 2010; 100th percentile)

High Earner ($68,934 in 2010; 81st percentile)

10 Source: 2010 OASDI Trustees Report 0 1960 1980 2000 2020 2040 2060 2080
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Employee Benefit Research Institute 2012

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
16% 14% 12% 10% 8% 6% 4% 2% 0% 26-35 36-45 Age
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 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.

9.8%

15.1%

Salary
Lowest

2
3 Highest

46-55

56-65

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Employee Benefit Research Institute 2012

Simulated Impact of 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 for Employees Currently 2635, by Plan Size and Agespecific Salary Quartiles: Midpoint Estimates
45% 40% 35% 30% Average Percentage Reductions in 401(k) 25% Account Balances at Social Security Normal 20% Retirement Age 15% 10% 5% 0% <1M 1-10M 10-50M 50-250M 250-500M >500M Lowest income quartile 36.4% 40.1% 22.8% 20.2% 20.2% 23.5% 2 28.8% 32.4% 13.7% 11.4% 10.4% 12.2% 3 22.8% 26.9% 7.4% 3.3% 3.2% 6.8% Highest income quartile 26.5% 31.5% 12.8% 8.5% 8.3% 13.1%

Source: Author's calculations based on results from EBRI Retirement Security Projection Model Version 1472, and responses to AllianceBernstein (2011) and Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2012 Retirement Confidence Survey. Note: This simulation models only the financial impact of the expected reduction in 401(k) account balances for employees who are not automatically enrolled by modifying the behavior of plan sponsors and participants and does not attempt to assess behavioral modifications on the part of eligible nonparticipants. 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 a future analysis. Plan sponsor and participant reactions to the proposal are explained in the text. Employer increases or decreases to contributions are represented by the midpoint of the range denoted on the AllianceBernstein survey.

For more detail, see VanDerhei (March 2012)

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Employee Benefit Research Institute 2012

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1100 13th Street NW Washington, D.C. 20005 202-659-0670 www.ebri.org www.choosetosave.org

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Employee Benefit Research Institute 2012