Starting (Over) Points

By Nevin Adams, EBRI

Adams

Earlier this week, an EBRI research report quantified the financial impact of setting a higher starting point for 401(k) default contributions—and it can be significant.

Most private-sector employers that automatically enroll their 401(k) participants do so at a default rate of 3 percent of pay,(1) a level consistent with the starting rate set out in the Pension Protection Act of 2006 as part of its automatic enrollment safe harbor provisions—but it’s a rate that many financial experts acknowledge is far too low to generate sufficient assets for a comfortable retirement.

EBRI has previously modeled the impact of automatic enrollment(2) (see “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here).  In the most recent research, using EBRI’s proprietary Retirement Security Projection Model® (RSPM), the impact of raising the default contribution rate to 6 percent for younger workers (who might have 31–40 years of simulated 401(k) eligibility) in plans with automatic enrollment and automatic escalation was evaluated to see how many would be likely to achieve a total income real replacement rate of 80 percent at retirement.

As noted earlier, the higher starting default made a significant impact; more than a quarter of those in the lowest-income quartile who had previously NOT been simulated to have reached the initial replacement rate target (under the actual default contribution rates) would reach the target as a result of the increase in raising the starting deferral rate to 6 percent of compensation. Even those in the highest-income quartile would benefit, although not as much.(3)

But what about when those workers change jobs: Would they “start over” at the new employer’s starting default rate, or would they “remember” and carry their higher rate of savings at their prior employer into the new plan? The modeling actually looked at both those scenarios,(4) and found that 15–26 percent of the lowest-income quartile that would otherwise not have reached the target threshold under their existing plan-specific deferral rates would now do so at the 6 percent level, as would 13–22 percent of those in the highest-income quartile.

In life, “starting over” can be a painful, awkward process, as anyone who’s restarted a career or home can attest. But, depending on where you are starting from—and what kind of start you make—it can also be an opportunity.

Notes

(1) Which, it should be noted, also contemplates an annual 1 percent automatic escalation of that starting rate, up to a designated level. Neither the automatic enrollment nor automatic escalation provisions are mandated by the legislation, unless the plan sponsor wants to take advantage of the PPA safe harbor protections.

(2) One point that had been made clear in previous research was that some workers who were defaulted into a 401(k) auto-enrollment (AE) plan (without auto-escalation provisions) would continue to contribute at the defaulted contribution rate chosen, typically in the range of 3 percent of compensation. Traditionally, and in the absence of these AE provisions, many workers eligible for workplace retirement savings plans have voluntarily elected to start contributing at a 6 percent rate (a point commonly associated with the level of matching contribution incentive provided by employers). However, some participants in AE plans—who otherwise might have voluntarily chosen to participate at a higher contribution level—instead might simply allow their savings to start (and remain) at the default rate. As a result, they were likely contributing at a lower rate than if they had been working for a plan sponsor offering a voluntary enrollment (VE) 401(k) plan AND had made a positive election to participate.

(3) The modeling assumed actual plan-specific default contribution rates with (1) an automatic annual deferral escalation of 1 percent of compensation; (2) that employees opted out of that auto-escalation at the self-reported rates from the 2007 Retirement Confidence Survey findings; (3) that they “started over” at the plan’s default rate when they changed jobs and began participation in a new plan; and (4) that the plan imposed a 15 percent cap on employee contributions.

(4) Among other criteria, the modeling also considered auto escalation rates of 1 percent and 2 percent.

Employment-Based Health Coverage Continues Decline; Uninsured Rate Shrinks as Public Coverage Grows

The uninsured rate for working-age Americans ticked down in 2011, but only because public program coverage grew faster than employment-based health insurance coverage declined, according to a new report by EBRI.

While employment-based health coverage is still the dominant source of health insurance in the United States, it has been steadily shrinking since 2000. The latest data show that it continued to do so last year.

The EBRI analysis finds that the percentage of the nonelderly population (under age 65) with health insurance coverage increased to 82 percent in 2011 (up about half a percentage point from 2010), which is notable since increases in health insurance coverage have been recorded in only three years since 1994.

However, different trends are taking place behind that overall result: Among the nonelderly population, employment-based coverage is trending down (58.4 percent had employment-based benefits in 20011, down from the peak of 69.3 percent in 2000), while public-program coverage is trending up (accounting for 22.5 percent of the nonelderly population, up from the low of 14.1 percent in 1999).

Enrollment in Medicaid (the federal-state health care program for poor) and the State Children’s Health Insurance Program (S-CHIP) increased to a combined 46.9 million in 2011, covering 17.6 percent of the nonelderly population, significantly above the 10.2 percent level of 1999. Other sources of public health insurance include Medicare (which covers many disabled as well as the elderly), Tricare, CHAMPVA, and Veterans Administration (VA) health insurance.

Full details of the EBRI report, “Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2012 Current Population Survey,” are published in the September 2012 EBRI Issue Brief, no. 376, online at www.ebri.org  The report is based primarily on the March 2012 Current Population Survey (CPS) conducted by the U.S. Census Bureau, with some analysis based on other Census surveys.

The full report is online here. The press release is online here.

401(k) Ownership Continues to Grow, While IRA Ownership Falls

Although fewer American families are participating in a retirement plan at work, more of those with a plan are in a 401(k). At the same time, ownership of individual retirement accounts (IRAs) is falling, according to a new report by EBRI.

Analyzing the four-year period from 2007‒2010, EBRI finds that the share of American families with a member in any employment-based retirement plan from a current employer increased steadily from 38.8 percent in 1992 to 40.6 percent in 2007, before declining in 2010 to 37.9 percent.

Ownership of 401(k)-type plans among families participating in a retirement plan more than doubled from 31.6 percent in 1992 to 79.5 percent in 2007, and increased again in 2010 to 82.1 percent. But the percentage of families owning an IRA or Keogh retirement plan (for the self-employed) declined from 30.6 percent in 2007 to 28.0 percent in 2010. In addition, the percentage of families with a retirement plan from a current employer, a previous employer’s defined contribution plan, or an IRA/Keogh declined from 66.2 percent in 2007 to 63.8 percent in 2010.

As in the past, EBRI found that retirement plan assets account for a growing majority of most Americans’ financial wealth, outside the value of their home. The median (mid-point) percentage of families’ total financial assets comprised by defined contribution plan assets and/or IRA/Keogh assets (assuming the family had any) increased from 2007 to 2010, and accounted for a clear majority of these assets:

• Defined contribution plan balances accounted for 58.1 percent of families’ total financial assets in 2007, and that share grew to 61.4 percent in 2010.
• Defined contribution and/or IRA/Keogh balances increased their share as well, from 64.1 percent of total family financial assets in 2007 to 65.7 percent in 2010. Across all demographic groups, these assets account for a very large share of total financial assets for those who own these accounts.

However, the EBRI report notes that the most recent data, along with other EBRI research, indicate that many people are unlikely to afford a comfortable retirement. “Americans lost a tremendous amount of wealth between 2007 and 2010, and the percentage of families that participated in an employment-based retirement plan and/or owned an IRA decreased as well,” said Craig Copeland, EBRI senior research associated and author of the report.

However, he added, the percentage of family heads who were eligible to participate in a defined contribution plan and actually did so remained virtually unchanged during this time. Therefore, despite all the bad news that resulted from this period, one positive factor should be noted: “Those eligible to participate in a retirement plan continued to participate—which may help change the likelihood of a lower retirement standard for many Americans,” Copeland said.

The full report is published in the September 2012 EBRI Issue Brief, available at EBRI’s Web site at www.ebri.org   The press release is online here.

 

Higher Starting Point Would Significantly Increase Retirement Security “Success”

Setting a higher starting point for 401(k) contributions would make a significant difference in improving workers’ likelihood of a financially viable retirement, according to new research by EBRI.

Most private-sector employers that automatically enroll their 401(k) participants do so at a default rate of 3 percent of pay, a level consistent with the starting rate set out in the Pension Protection Act of 2006, but a rate that many financial experts say is far too low to generate sufficient assets for a comfortable retirement. Raising the default saving rate to 6 percent would significantly increase the chances for achieving retirement adequacy “success” for both low- and high-income workers, EBRI found.

Using its proprietary Retirement Security Projection Model® (RSPM), EBRI evaluated the impact of raising the default contribution rate on younger workers (with 31–40 years of simulated 401(k) eligibility) to see how many would be likely to achieve a to achieve a total income real replacement rate of 80 percent at retirement—within the typical range of replacement rates suggested by many financial consultants.

A key variable in considering the impact of auto-enrollment in 401(k) plans with automatic escalation of contributions is whether workers who change jobs continue to save at their previous (and typically higher) contribution rate, or whether they “start over” in the new job at the typical lower automatic deferral rate of 3 percent.

Jack VanDerhei

Under the EBRI modeling, more than a quarter (25.6 percent) of those in the lowest-income quartile who had previously NOT been modeled to have a financially successful retirement (under the actual default contribution rates) would be successful as a result of the increase in starting deferral rate to 6 percent of compensation. Even workers in the highest-income quartile would benefit, although not as much: Just over 18 percent who would not be successful under the actual default contribution rate would be successful due to the higher 6 percent default rate.

“This study shows that substantial increases in success rates were found for both low- and high-income employees if employers raised the default 401(k) contribution rate to 6 percent of pay,” said Jack VanDerhei, EBRI research director and author of the report.

Full results are published in the September EBRI Notes, “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” available online at www.ebri.org

Americans Still Confident About Health Care, But Concerned About Cost

The recent U.S. Supreme Court decision upholding the constitutionality of the Patient Protection and Affordable Care Act (PPACA) appears to have had little impact on Americans’ confidence about their health care, according to a new report by EBRI.

“Public confidence about various aspects of today’s health care system has remained fairly level both before and after the passage of the health care reform law,” said Paul Fronstin, director of EBRI’s Health and Education Research Center and author of the report. “The Supreme Court decision did not change how people view the system.”

Data from the EBRI/MGA 2012 Health Confidence Survey (HCS) show that two years after passage of the Patient Protection and Affordable Care Act (PPACA), implementation of a number of provisions in the legislation, and three months after the Supreme Court upheld the law, Americans offer a diverse perspective: 28 percent consider the nation’s health care system to be “good,” 28 percent say “fair,” and 26 percent rate it “poor,” while 12 percent rate it very good and 5 percent say it is “excellent.”

Fronstin noted that, in contrast with the ratings for the health care system overall, Americans’ rating of their own health plans continues to be generally favorable—more than half of those with health insurance are extremely or very satisfied with their current plans, and a third are somewhat satisfied.

On the other hand, just 22 percent are extremely or very satisfied with the cost of their health insurance plans, and only 16 percent are satisfied with the costs of health care services not covered by insurance. Among those experiencing cost increases in their plans in the past year, 31 percent state they have decreased their contributions to retirement plans, and more than half have decreased their contributions to other savings as a result.

The report, “2012 Health Confidence Survey: Americans Remain Confident About Health Care, Concerned About Costs, Following Supreme Court Decision,” is published in the September EBRI Notes, available online at www.ebri.org  The HCS examines a broad spectrum of health care issues, including Americans’ satisfaction with health care today, their confidence in the future of the health care system and the Medicare program, and their attitudes toward health care reform.

Question “Mark”

By Nevin Adams, EBRI

Adams

Next month we’ll enter the final full month of the 2012 election cycle with a series of presidential (and one vice presidential) debates. Pundits claim these don’t have much impact on the election’s outcome, but millions of Americans will likely tune in anyway, either to help them make a decision, to reinforce the one they made months ago, or perhaps just for the prospect of seeing a historic gaffe. The answers, of course, will receive the most scrutiny, though as any journalist (or pollster) will tell you, the art lies in asking the “right” question.

In the not-too-distant future, EBRI will, in conjunction with Matt Greenwald & Associates, Inc., field the 2013 Retirement Confidence Survey.¹ Over its 23-year history, the RCS has examined the attitudes and behavior of American workers and retirees toward all aspects of saving, retirement planning, and long-term financial security. The survey itself—the longest-running survey of its kind in the nation—is meaningful both for the kinds of issues it deals with and the trends it measures: It’s tracked a “new normal,” where workers adjust their expectations about the transition to retirement; examined both age and gender differences on saving and planning for retirement; tracked attitudes about Social Security and Medicare; and compared expectations about retirement to the realities.²

Not surprisingly, coverage of the survey by the media continues to be quite extensive. The 2012 RCS was released on March 13, 2012,³ and partial tracking (to Sept. 5, 2012) found the 2012 RCS mentioned in 50 newspapers, 26 periodicals, 35 web-based outlets, 22 broadcast outlets (including CNN Money, CNBC.com, and CBS News), as well as eight newswire services.

Significantly, the RCS doesn’t merely deal with confidence as a “feeling,” but also at the criteria that underlie and influence that sentiment. It looks at the perspective both of those already in retirement, as well as those still working and heading toward that milestone, and does so with the perspective of research that has focused on those issues for more than two decades. It also (with a perspective based on more than 20 years of conducting this particular survey) offers insights on how those feelings and factors have changed over time.

From past experience, we know that how individuals view—and anticipate—retirement can have a dramatic impact on that reality. Each year the RCS research team, in collaboration with the survey’s advisory board of underwriters, meets to consider not only past trends and the present environment, but also future developments, as we seek to craft the right set of questions to help explore and expand our collective understanding of these critical issues.

As with many things in life, when it comes to planning for retirement, it’s hard to know what the right answer is if you aren’t asking the right questions.

P.S. The Retirement Confidence Survey is funded through subscriptions. In 2012, there were 26 subscribers (see the full list online here),  which keeps the cost down to $7,500 per subscriber. If you’re interested in supporting and being part of the planning for the 2013 RCS, please email me.

 Notes

¹ The need and demand for reliable data about America’s retirement system, and worker/retiree post-career readiness for retirement has never been greater. If you’d like to know more, or participate as an underwriter of this important survey, please email Nevin Adams. A list of the 2012 RCS Underwriters is available online here. 

² Information from prior editions of the Retirement Confidence Survey is available online here. 

³ Data from the 2012 RCS is available online here. 

“Last” Chances

By Nevin Adams, EBRI

While many Americans seem to lack a definitive sense of what living in retirement will be like, how long it will last, or how much it will cost, their sense of when it will begin has been trending older.  The 2012 Retirement Confidence Survey (RCS) noted that, whereas in 1991, just 11 percent of workers expected to retire after age 65, in 2012, more than three times as many (37 percent) report they expect to wait until after age 65 to retire—and most of those indicated an expected retirement age of 70 or older.¹

Those expecting to delay retirement perhaps found solace in a recent report by the Center for Retirement Research (CRR) at Boston College which concluded that by postponing retirement until age 70, the vast majority of households (86 percent) were “…projected to be prepared for retirement.”

That sounds good – but what about the assumptions underlying that conclusion?

In 2003, the Employee Benefit Research Institute (EBRI) constructed the EBRI-ERF Retirement Security Projection Model® (RSPM)—the first nationally representative, micro-simulation model based on actual 401(k) participant behavior and a stochastic decumulation model.  And though we have explicitly recognized that many individuals were retiring at earlier ages, a retirement age of 65 was chosen for baseline results, based upon the assumption that most workers would have the flexibility to work until that age, if they so chose.

Last year we modified the RSPM to determine whether just “working a few more years after age 65” would indeed be a feasible financial solution for those determined to be “at risk.”  Unfortunately, for those counting on that as a retirement savings “solution”, the answer is not always “yes.”

Indeed, results from the EBRI modeling indicated that the lowest pre-retirement income quartile would need to defer retirement to age 84 before 90 percent of the households would have even a break-even (50‒50) chance of success.

Working longer does help, of course.  A recent EBRI Notes article titled “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?²” finds that 23 percent of those who would have been at risk of running out money in retirement if they retired at age 65 would be “ready to retire” if they kept working to 70.  Better still, if those individuals are assumed not only to delay retirement, but also to keep participating in a defined contribution plan, a full third of those who would have been at risk of running short of money if they retired at age 65 would be “ready” to retire at age 70.³

What accounts for the difference in the projections?  For a household to be classified as “ready for retirement” under the CRR method, a projected replacement rate is simply compared with a benchmark rate, while the RSPM uses a fully developed stochastic decumulation process to determine whether a family will run short of money in retirement (and, if so, at what age) under each of a thousand alternative, simulated retirement paths.  Unlike the CRR model, EBRI’s RSPM model simultaneously considers the impact of longevity risk, investment risk, and the risk of potentially catastrophic health care costs (such as prolonged stays in a nursing home).⁵

Which, as it so happens, are the same things that those trying to make sure they have enough money to last through retirement—and those trying to help them do so—need to consider.

Notes

¹ see “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?”

² Also from the above article, “It’s worth nothing that a significant portion of the improvement in readiness takes place in the first four years after age 65, but that tends to level off in the early 70s before picking up in the late 70s and early 80s.  Higher-income households would be in a much better situation: 90 percent of the highest-income quartile would already have a 50 percent probability of success by age 65, while those in the next-highest income quartile would need to wait until age 72 for 90 percent of their group to have a 50 percent probability. Those in the second-lowest income quartile would need to wait until age 81 before 90 percent of their group had a 50 percent probability of success. 

³ At the same time, the percentage of workers expecting to retire before age 65 has decreased from 50 percent in 1991 to 24 percent (see this EBRI analysis, online here).  A sizable proportion of retirees report each year that they retired sooner than they had planned (50 percent in 2012). Those who retire early often do so for negative reasons, such as a health problem or disability (51 percent) or company downsizing or closure (21 percent).  The 2011 RCS found that the poor economy (36 percent), lack of faith in Social Security or the government (16 percent) and a change in employment situation (15 percent) were the most frequently cited reasons for postponing retirement.

⁴. For more on how this modeling works, see “Single Best Answer.”

⁵ For an explanation of four things that are sometimes overlooked by retirement-needs projection models, see “Generation ‘Gaps,’” online here.

The Impact on the Uninsured of the Baby Boom Generation Reaching Age 65

By Paul Fronstin, EBRI

This week the Census Bureau released its annual report on income, poverty and the uninsured. The number of uninsured increases naturally because of population growth even when the percentage declines, but in 2011 both the percentage of the population and the number uninsured declined: Between 2010 and 2011, the percentage uninsured fell from 16.3 percent to 15.7 percent and the number fell from 50 million to 48.6 million. In fact, 2011 was only one of four years since 1994 that saw a decline in the percentage uninsured.

Click to enlarge

Why did both those measures fall in 2011?

Some segments of the population did see an increase in employment-based coverage, notably young adults taking advantage of the adult dependent mandate in the Affordable Care Act (ACA), but these gains were offset by other loses (such as the decline in coverage from one’s own job for workers of all ages), negating any impact on the aggregate decline in the uninsured. The percentage of the population with employment-based health benefits stood at 55.1 percent in 2011, compared with 55.3 percent the previous year, so it would not account for the decline in the uninsured.

There was growth in the number of people covered by Medicaid and SCHIP (the State Children’s Health Insurance Program). In 2011, 16.5 percent of the population had Medicaid or SCHIP, up from 15.8 percent in 2010. So this increase accounted for some of the decline in the uninsured.

Overall, the decline in uninsured was largely associated with a rise in the share of people covered by government-sponsored health plans, increasing to 32.2 percent in 2011 from 31.2 percent in 2010.

Coincident with this trend, it’s worth noting that the leading edge of the Baby Boom generation (the cohort of individuals born between 1946‒1964) turned 65 in 2011, meaning that this generation is finally reaching Medicare eligibility.

Statistically, 65-year-olds have now reached 1 percent of the total U.S. population. While not yet a large number, it is the largest in recent history, driving up Medicare enrollments, and perhaps marking the cusp of a significant demographic shift in insurance trends.

Click to enlarge

APP Solution

By Nevin Adams

Adams

A couple of weeks back, I was on one of Virginia’s Civil War battlefields, looking to join one of the local park ranger tours. This particular one was scheduled to start deep within the park itself, and while I left home certain that I knew where I was heading, when I got there, I quickly discovered otherwise.

Fortunately, or so I thought at the time, there were about a half dozen other individuals also looking to find the same tour. We quickly convened around a shared map, looked for landmarks, and—based on the collective sense of the group—headed off in what seemed to be the right direction.

Five minutes later I began to suspect we were not heading in the right direction, and 15minutes later I was sure of it. Then I remembered that I had recently downloaded a smartphone “app” for this particular battlefield—one that not only contained a map, but also a GPS feature that allowed me to not only find where I was but to visualize where I needed to be. With that, we could begin heading in the right direction.

Smartphones are an increasingly important part of our lives, in no small part because of the “apps” (short for applications) that they bring to us. These days, apps make it possible to order a pizza, identify that song playing on the radio (and order and/or download your own copy), scan price codes and comparison shop without leaving the store.

While many of today’s “apps” offer much in the way of entertainment and informational value, a great many of them also make it easy to spend , rather than save, money. In fact, the 2012 Retirement Confidence Survey by the Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., found that the use of technology, such as smart phones and tablet computers to help manage finances was still relatively rare.¹

But now there’s a new app designed to make it easier to know where you are in your retirement savings: the EBRI Ballpark E$timate,® developed by Matrix Group International, Inc., and the research team at EBRI, and provided by Choose to Save.®

As a web-based tool, and as a hardcopy reference, the EBRI Ballpark E$timate® (as well as other tools and information available at www.choosetosave.org²) has long helped millions of Americans do a better job of planning for their financial future.

Now the EBRI Ballpark E$timate® “app” (like that smartphone GPS) can help Americans do a better job of knowing where they are—so they can make sure they are headed in the right direction, too.

The EBRI Ballpark E$timate® is currently available as a free download from the iPhone store. More information is online here.

Notes

¹ “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” is online here. 

² In addition to the Ballpark E$timate,® you will find a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants available at www.choosetosave.org