Economics of Loyalty - Summary of Findings (Canada)
July 2012 Savings Coalition Retirement Savings Event
1. 30th Anniversary of the Universal IRA: A Time to Look at All
Retirement Savings Today and Going Forward
Jack VanDerhei
Research Director, Employee Benefit Research Institute
vanderhei@ebri.org
Savings Coalition of America
July 18, 2012
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2. Questions to consider
• What is the best way to assess the current state of retirement
savings?
• Primary focus on 401(k) plans
• Preliminary evidence of adding IRAs (regular and rollover)
• Given current contribution and asset allocation behavior, what is the
potential for retirement savings for those covered by 401(k) plans for
an entire career?
• Voluntary enrollment vs. automatic enrollment
• High income vs. low income employees
• Bottom line: How does all of this impact retirement income adequacy
for those still working?
• Impact of 401(k) eligibility on at-risk ratings for Gen Xers
• Impact of recent proposals to modify the Federal tax incentives
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3. Best way to assess the current state of 401(k) plans?
• Overall average balances?
• Overall average = $60,329 (year-end 2010)
• Based on individual administrative records of more than 23 million participants
• EBRI/ICI Participant-Directed Retirement Plan Data Collection Project
• Problems:
• This will include young employees with many years until retirement
• Even if one looks only at those close to retirement age
• Problem with employees who may have changed jobs recently
• Participant balances by age and tenure
• Average for participants in their 60s with at least 30 years of tenure with current employer
• $202,329 (year-end 2010)
• Average for NWD* participants 55-64 with at least 30 years of tenure with current employer
• $255,075 (year-end 2010)
• 6/30/12 estimate = $296,142
• Add in amounts that these participants have in IRAs
• Upon job change many 401(k) participants will roll over their 401(k) balances into an IRA
• Simulated account balances or replacement rates at retirement age
• Many of those now approaching retirement have not had the opportunity to be covered by a 401(k) plan their
entire career (November 1981 Proposed Regs)
• Changes in plan design (e.g., move to auto enrollment with auto escalation)
*NWD = only participants with positive values for the
sum of employee and employer contributions in 2010. 3
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4. How Much Is Missing By Not Looking at IRAs Also?
Median ratios of combined 401(k) and IRA balances as a multiple of 401(k) balance by age and tenure.
Analysis limited to individuals with both 401(k) and IRA balances at the end of 2010.
9.00
Average 2010 combined 401(k) and IRA balances
8.00
for these participants in their 60’s= $275,517
7.00
6.00
5.00
4.00
3.00
2.00
1.00
-
30s 40s 50s 60s
0-2 3.15 4.89 6.82 8.53
2-5 1.52 2.01 2.69 3.54
5-10 1.22 1.40 1.69 2.09
10-20 1.13 1.16 1.27 1.53
20-30 1.11 1.12 1.28
> 30 1.14 1.23
Source: preliminary analysis of 2010 integrated EBRI defined
contribution/IRA database ® Employee Benefit Research Institute 2012
5. Median Replacement Rates from Voluntary Enrollment
401(k) Plans for Participants Reaching Age 65 Between
2030 and 2039, by Income Quartile at Age 65
80%
• For the LOWEST income quartile, current
Nominal Replacement Rates
participants who are assumed to always be eligible
70%
to participate in a 401(k) plan are simulated to
60%
have a median replacement rate from 401(k)
50%
accumulations* of 51 percent
40%
• Assuming an ad-hoc temporary bear market will
30%
decrease this by different percentages depending
20%
on when it happens
10%
• Worst if it hits at the end of the career (37
0%
Lowest income Highest income percent)
quartile quartile
• However this is still significantly better than a
Median Replacement
Rates for 401(k)
current participant with “random” coverage in the
51% 67% future even if there is no ad-hoc temporary bear
Participant with
Continous Eligibility market assumed (23 percent)
Bear market at start
48% 64% • Bottom line: having continuous eligibility (i.e.,
of career
employers offering plans) is the critical factor in
Bear market at
middle of career
43% 57% producing adequate retirement income for these
Bear market at end
employees
37% 49%
of career
Assuming Do Not
Always Have 401(k)
23% 28%
Plan Coverage (no
bear market)
Source: Holden and VanDerhei (November 2002)
* 401(k) accumulations include IRA rollovers 5
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6. 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
90%
• Unlike the more traditional type of 401(k) plan,
automatic enrollment plans (especially those with
80%
automatic escalation of contributions) are relatively
70%
new
• Simulating success rates under these plans requires
60% several types of behavioral assumptions
• A total of 16 different scenarios have been
50% modeled but this graph shows only the most
optimistic and most pessimistic set of
Probability
40% assumptions
• Looking at workers currently ages 25–29 who will
30%
have more than 30 years of simulated eligibility for
20% participation in a 401(k) plan:
• workers in the highest income quartile:
10% between 41 and 64 percent are expected to
Maximum Employee Contributions have at least an 80 percent real replacement
0% rate when 401(k) accumulations are combined
6% 9% 12% 15%
with Social Security benefits
Lowest,
48.9% 64.2% 73.5% 79.2% • Given their higher relative levels of Social
Optimistic
Highest, Security benefits, the percentages are even
28.9% 41.0% 53.0% 64.0%
Optimistic higher for workers in the lowest income
Lowest, quartile– between 62 and 79 percent
45.7% 56.4% 61.0% 62.1%
Pessimistic
Highest,
27.0% 34.1% 38.8% 41.1%
Pessimistic
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. The population simulated consists of. 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
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7. Impact of future years of 401(k) eligibility on 2012 at‐risk*
70.0% ratings for Gen Xers
60.7%
60.0%
At-risk ≈ probability that the household will run
50.0%
“short” of money in retirement
41.1%
40.0%
30.6%
30.0%
20.0% 18.2%
10.0%
0.0%
0 1-9 10-19 20+
Future years of 401(k) eligibility
*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 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 net housing equity ( in the form of 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 thresholds.
Source: EBRI Retirement Security Projection Model,® Version 120201.
Source: VanDerhei (May 2012)
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8. The previous averages and projections were based on the
current Federal Income Tax incentives for 401(k) plans.
What happens if that is no longer the case?
Average Percentage Reductions in • Testimony at the Senate Finance Committee
401(k) Account Balances at Social Hearing (September 2011) analyzed a
Security Normal Retirement Age proposal to modify the Federal tax treatment
45% of employer and employee contributions for
40% 401(k) plans in exchange for an 18 percent
35% match from the Federal government
30%
25% • Since that time EBRI has surveyed workers
20% currently contributing to a 401(k) plan and
15% sponsors currently offering 401(k) plans
10%
• Graph shows the simulated average
5%
percentage reductions in 401(k) balances at
0%
Lowest Highest retirement for employees currently 26-35.
income 2 3 income
quartile quartile • By plan size
<1M 36.4% 28.8% 22.8% 26.5% • By employee’s income quartile
1-10M 40.1% 32.4% 26.9% 31.5%
• For the lowest income employees in plans
10-50M 22.8% 13.7% 7.4% 12.8%
50-250M 20.2% 11.4% 3.3% 8.5%
with less than $10 million in assets, the
250-500M 20.2% 10.4% 3.2% 8.3% average reductions are 36 to 40 percent
>500M 23.5% 12.2% 6.8% 13.1%
Source: VanDerhei (April 2012)
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9. 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 (July 2011) “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of
the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,”
EBRI Notes
• VanDerhei (April 2012), “Tax Reform and Tax‐Favored Retirement Accounts,” Testimony for the
House Committee on Ways and Means.
• VanDerhei (May 2012). Retirement Income Adequacy for Boomers and Gen Xers: Evidence from
the 2012 EBRI Retirement Security Projection Model®, EBRI Notes
• VanDerhei, Holden, Alonso and Bass (December 2011), “401(k) Plan Asset Allocation, Account
Balances, and Loan Activity in 2010” (pp. 68). December 2011, EBRI Issue Brief #366
• VanDerhei and Lucas (November 2010), The Impact of Auto-enrollment and Automatic
Contribution Escalation on Retirement Income Adequacy, EBRI Issue Brief
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10. Appendix: Brief Chronology of the EBRI
Retirement Security Projection Model®
• 2001, Oregon
• 2009, Pension Research Council
o Simulated retirement wealth vs. ad hoc thresholds
o Winners/losers analysis of defined benefit
for retirement expenses
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
• 2008, EBRI policy forum (May) employer-provided retirement benefits and
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
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11. Appendix (continued)
o 2012, Urban Institute Presentation
o 2011, February EBRI Issue Brief (February)
o Analyzes the impact of the 2008/9 crisis o Analyzes whether Boomer and Gen X
in the financial and real estate markets women will be able to afford
on retirement income adequacy retirement at age 65
o 2011, EBRI policy forum (May)
o 2012, March EBRI Notes article
o Analyzes impact of deferring retirement
age o Analyzes employer and employee
o 2011, July EBRI Notes article reaction to proposal to modify tax
o Analyzes the impact of the 20/20 limit incentives for defined contribution
recommended by the National plans and simulates the expected
Commission on Fiscal Responsibility impact on account balances at
and Reform
retirement age
o 2011, August EBRI Notes article
o Analyzes value of defined benefit plans o 2012, May EBRI Notes article
o 2011, Senate Finance Hearing (September) o Updates RSPM to 2012
o Analyzes the impact of modifying tax o 2012, June EBRI Notes article
incentives for defined contribution plans
o Analyzes the impact of eligibility for
participation in a 401(k) plan on Gen
Xers
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12. Household balances
• 2010 SCF (for all defined contribution plans with current employer for households)
• Overall average = $121,000 (regardless of age and tenure)
• Household average of $424,874 for head of family 55-64 with at least 20 years of tenure with current
employer
• Nb: very small sample size for SCF -- only 2100 households (for all age/tenure combinations)
with defined contribution plans currently
• Combined defined contribution and IRA (for those with both):
• Overall average = $343,000 (regardless of age and tenure)
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13. Upside down incentives?
• From a financial economics perspective,
Year-end 2010 Ratio of 401(k) Account Balance to
the current federal tax treatment for 401(k) Salary for Participants in Their 60s, by Tenure
plans has advantages for workers with a 400%
higher marginal tax rate IF other elements
of the tax code are ignored 350%
>20 Years
• IRC Sections 402(g) and 415(c) combined 300%
with ADP requirements have resulted in a
relatively flat multiple of final earnings at 250%
retirement as a function of salary (graph) 200%
150%
100% >10–20 Years
50%
0%
Salary Range
Source: VanDerhei, Holden, Alonso and Bass (2011)
Note: The tenure variable is generally years working at current
employer, and thus may overstate years of participation in the
401(k) plan.
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14. Average Percentage Reductions in 401(k) Account Balances at
Social Security NRA,a by Imposing 20/20 Limits in 2012,
by Age and Age-specific Salary Quartiles
16%
14% Participant Income Group
Lowest
12% 2
3
Reduction in Account
10% Highest
8%
6%
4%
2%
0%
26−35 36−45 46−55 56−65
Source: EBRI Retirement Security Projection Model Version 110627c1.
a Normal retirement age.
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.
Source: VanDerhei (July 2011)
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