Is There a Future for Retirement? in a World of Individual Decisions?

Dallas L. Salisbury President Employee Benefit Research Institute June 13, 2011

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Plan Type Distinctions

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

Source:DoLForm5500Summariesthrough1998. *EBRIestimates1999-2009

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Defined Benefit Plans in Transition

1/3 of private DB now hybrid with LSD option of private DB offer LSD at retirement and job change Most private DB offer LSD on pre-retirement job change Five states have now begun shift to plans that offer LSD Pressure to move to DC from DB in public sector would likely include move to individual direction and LSD options

Introduces many individual decisions with the most important being whether or not to take any life income since the older you get the more longevity risk becomes your biggest risk (and running out of money before you run out of life)

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Employee Benefit Research Institute 2011

Active Participants in 401(k) Plans, 1984-2008 (millions)

Source:DoLPensionPlanBulletin,HistoricalTables,1975-2008. *In2004,theDoLcountedactiveparticipantsdifferentlycausingaoneyearjumpinthenumberofactiveparticipants.

Employee Benefit Research Institute 2011

Number of 401(k) Plans, 1984-2008

Source:DoLPensionPlanBulletin,HistoricalTables,1975-2008.

Employee Benefit Research Institute 2011

Brief Chronology of the Development of the 401(k) plan in the US

Genesis -- 1978
Section 401(k) added to IRC Proposed regulations 402(g) limit ADP/ACP nondiscrimination tests Restrictions on hardship withdrawals Safe-harbor plans (might want to mention SIMPLE plans too but I dont think you will have enough time) Automatic enrollment Catch up contributions Roth 401(k) PPA and the mitigation of administrative concerns for automatic enrollment Increase in percentage of 401(k) plans using automatic enrollment and auto escalation of contributions QDIA regulations The rise of TDFs 2008/9 market crises Enron and the appropriateness of company stock

Expansion to salary deferrals -- November 1981 Constraints added in the 1980s*

Flexibility added in the 1990s

The last ten years

*mentionthat415(c)wasdecreasedbutthatappliedtoallDCplans

Employee Benefit Research Institute 2011

Employee contributions for men by age as a percentage of annual compensation for various combinations of initial match rate and maximum amount of compensation matched

Source:VanDerhei, J. L. Copeland, C. A Behavioral Model for Predicting Employee Contributions to 401(k) Plans. North American Actuarial Journal (2001). Employee Benefit Research Institute 2011

Predicted Contributions for Selected Persons and Plans

Source:VanDerhei, J. L. Copeland, C. A Behavioral Model for Predicting Employee Contributions to 401(k) Plans. North American Actuarial Journal (2001). Employee Benefit Research Institute 2011

2005 RCS results (see first row)

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Percentage of 401(k) participants continuing to contribute in 2008 after a suspension in employer contributions by match rate proxy

Impact of suspending employer contributions:

Note:tabulationsfrom401(k)planswithmorethan$100,000inemployer contributionsin2007andnonein2008. Source:JackVanDerhei,FallingStocks:WhatWillHappen toRetirees'Incomes?TheWorkerPerspective,Presentationfor Employee Benefit Research Institute 2011 TheEconomicCrisisof2008:WhatWillHappentoRetirees

The percentage of workers doing a retirement needs calculation.

Have you (or your spouse) tried to figure out how much money you will need to have saved by the time you retire so that you can live comfortably in retirement? (2011 Workers n=1004)

e:EmployeeBenefitResearchInstituteandMathewGreenwald&Associates,Inc., 011RetirementConfidenceSurveys.
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Where Are Account Balances?

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401(k) Account Balancesa Among 401(k) Participants Present From Year-End 1999 Through May 1, 2011b

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. a Account balances are participant account balances held in 401(k) plans at the participants' current employers and are net of plan loans. Retirement savings held in plans at previous employers or rolled over into IRAs are not included. b The analysis for 1999 through 2009 is based on a group of 1.6 million participants with account balances at the end of each year from 1999 through 2009. The values for 2010 and May 1, 2011 are EBRI estimates

Employee Benefit Research Institute 2011

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Figure 2: Change In Average Account Balances (by Age and Tenure) From January 1, 2010 June 1, 2011 Among 401(k) Participants with Account Balances as of Dec. 31, 2009

Sources:2009AccountBalances:TabulationsfromEBRI/ICIParticipant-DirectedRetirementPlanDataCollection Project;2011AccountBalances:EBRIestimates.Theanalysisisbasedonallparticipantswithaccountbalancesatthe endof2009andcontributioninformationforthatyear.

Employee Benefit Research Institute 2011

Tenure

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SeeEBRIApril2010IssueBriefformoredetail

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EBRIRetirementReadinessRating-whereisthebaselinetoday?

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EBRI 2010 Retirement Readiness Ratings

Sources:EBRI/ERFRetirementSecurityProjectionModelversion100504e;TheNational RetirementRiskIndex:AftertheCrash,CenterforRetirementResearchatBostonCollege,October 2009;Long-termCareCostsandtheNationalRetirementRiskIndex,CenterforRetirement ResearchatBostonCollege,March2009

Employee Benefit Research Institute 2011

Impact of salary on at risk probability

Source:EBRI/ERFRetirementSecurityProjectionModelversion100504e
Employee Benefit Research Institute 2011

Impact of age and future years of eligibility for participation in a defined contribution plan on at risk probabilities

Source:EBRI/ERFRetirementSecurityProjectionModelversion100504e
Employee Benefit Research Institute 2011

Analyzing the importance of retirement age

Figures 20-22 of the EBRI July 2010 Issue Brief presents additional savings (expressed as a percent of compensation) needed to achieve various probabilities of success for retirement age at 65
Unfortunately, the results for many combinations of age/income cohorts would be too high to be feasible

We have always known that the other possibility may be to defer retirement age
Assumes this is feasible I.E., no health problems for worker or spouse, job still available The Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned 45 percent in 2011

Easy to do stylized examples, but what would the impact be for baby boomers and gen Xers?

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HOW MUCH DO WE NEED WHEN WE CONSIDER HEALTH COSTS?

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Multiple of Final Earnings for a 90% Chance of Adequacy

Males Retiring at Age 65 in the Lowest-IncomeCategory: Final Earnings of $16,932 Building Block 2: Investment and longevity stochastic, health care expenses deterministic

16x&17XFinErn
Degree of Annuitization

20%
Degree of Annuitization

Longevity annuity Immediate annuity

Source: Simuations from Ballpark E$timate Monte Carlo, Employee Benefit R Degree of Annuitization

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Employee Benefit Research Institute 2011

Multiple of Final Earnings for a 90% Chance of Adequacy

Males Retiring at Age 65 in the Lowest-IncomeCategory: Final Earnings of $16,932 Building Block 3: Investment, longevity stochastic, and health care expenses stochastic

30xFinErn
Degree of Annuitization

21%&18%
Longevity annuity Immediate annuity

Source: Simuations from Ballpark E$timate Monte Carlo, Employee Benefit R Degree of Annuitization

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The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income

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Is There a Future for Retirement? in a World of Individual Decisions?

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In most cases: The Individual Will Decide!

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Discussion

DallasSalisbury

www.ebri.org www.choosetosave.org

Employee Benefit Research Institute 2011

 Employee Benefit Research Institute 2011