More or Less?

By Nevin Adams, EBRI

Adams

Adams

Earlier this week, the Wall Street Journal’s Anne Tergesen wrote a story titled “Mixed bag for auto-enrollment.” Citing data presented at last week’s EBRI policy forum,¹ the article claimed “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.”

She then proceeded to cite Aon Hewitt data presented at the policy forum that illustrated how workers at various salary levels at plans that offered automatic enrollment saved at a lower rate, on average, than workers at the same salary levels at plans that didn’t offer automatic enrollment. The article then went on to note that “The data confirms an analysis EBRI performed for The Wall Street Journal in 2011.”

Well, not exactly.

In a response to an article titled “401(k) Law Suppresses Saving for Retirement” that Tergesen wrote in 2011, EBRI Research Director Jack VanDerhei challenged the premise behind the headline of that article, explaining that it “…suggests that it is actually reducing savings for some people. What it failed to mention is that it’s increasing savings for many more—especially the lowest-income 401(k) participants.”

Not only that, he took issue with the conclusion, explaining that “The Wall Street Journal article reported only the most pessimistic set of assumptions and did not cite any of the other 15 combinations of assumptions reported in the study.”

The other statistic attributed to EBRI in the original WSJ article dealt with the percentage of automatic enrollment-eligible workers who would be expected to have larger tenure-specific worker contribution rates had they been voluntary enrollment-eligible instead. The simulation results EBRI provided showed that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a VE plan, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent (see chart below).

AE.NA-blog.17May13Are there those who once might have filled out an enrollment form and opted for a higher rate of deferral (say to the full level of match) that now take the “easy” way and allow themselves to be automatically enrolled at the lower rate adopted for most automatic enrollment plans? Absolutely. However, as the EBRI data show—and, for anyone paying attention, have shown for years now—the folks most likely to be disadvantaged by that lack of action are higher-income workers.

In fairness, while that 2011 article was titled “401(k) Law Suppresses Saving for Retirement,” the more recent coverage not only characterized automatic enrollment as a “mixed bag,” but acknowledged the “very positive effect on participation rates” as a result of automatic enrollment.

Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (until design features like automatic contribution acceleration kick in). Said another way, participation rates go up, and AVERAGE deferral rates dip—at least initially.

That might, in fact, mean that some individuals do, in fact, save less by default² than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default.

But that ignores the reality (borne out by the data) that many workers will be saving more—because that initial savings choice was automatic.

Notes

¹ Materials from EBRI’s 72nd Policy Forum, including a link to a recording of the event (courtesy of the International Foundation of Employee Benefit Plans) are online here.

² EBRI has recently considered how much difference setting a higher default contribution rate can make in improving retirement readiness. See “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

Lessons From Down Under: The Problem With Getting Half of the Retirement Equation Right

At this week’s Leadership Symposium at the Association of Superannuation Funds of Australia (ASFA) Conference in Melbourne I learned that things really are upside down in this part of the world.landdownunder

Susan Thorp of the University of Sydney was explaining how successfully Australia’s superannuation system had solved the retirement savings dilemma for Australians. And indeed, the statistics are impressive: According to ASFA, as of the end of June 2019, Australian workers had amassed nearly $3 trillion in the superannuation system.[1] A substantial number of them are beginning to enter retirement with significant balances.

About Australia’s Superannuation System

For those unfamiliar, since 2014, Australia’s superannuation system has required that Australian employers contribute 9.5 percent of workers’ pay into a defined contribution system similar to the United States’ 401(k) system. Workers must keep their money in the system until they retire or are disabled. At that point, individuals generally have tax-free access to their nest egg.

However, as Professor Thorp explained, the superannuation system has really solved only half of the retirement equation: While retirement savings in Australia is strong, “we absolutely haven’t solved the retirement spending dilemma,” she noted. She cited the following research on superannuation drawdown behavior: The majority of retirement withdrawals in the superannuation system are close to the minimum, and most retirees see their superannuation balance actually increase slightly in most years. If this continues, many Australians will die with substantial amounts of their savings unspent — and this is regardless of the size of the superannuation fund balance.[2]

That may sound like a nice problem to have — so much money in retirement that you cannot spend it all. But that’s really not what’s happening here. As EBRI’s research has noted about U.S. retirees in the current environment[3], Australian retirees seem to be hoarding their nest egg not because they want to but out of fear of longevity risk. Essentially, they are self-insuring so that they won’t run out of money as they age. That is suboptimal on many levels.

First, as Moshe Milevsky of York University pointed out in his presentation at the same symposium, the probability that even a healthy person will live beyond age 95 is extremely low, and budgeting for low-probability events isn’t very practical. It would be like setting aside $100,000 just in case someone is injured on your property and sues you.  Think of all the things you’d be giving up — vacations, a better house, a nicer car, higher-quality education for you or your family — in order to have that money sit in a bank account in anticipation of this highly unlikely event.

That’s essentially what these retirees are doing. They are resigning themselves to a lower standard of living in retirement after having accepted a reduced standard of living while working in order to save for retirement. Suboptimal indeed.

At the symposium, we brainstormed ways to help retirees tackle this dilemma. Some suggested it’s a math problem: Retirees are ill-equipped to figure out how to effectively spend their money and need guidance. Others suggested it’s a framing issue: Retirees continue to think of their nest egg as a balance, and when it comes to balances, growth is good. Instead, they should think about their retirement savings as an income stream and consider how sizable that income stream should be. Still others wondered if we were just all making a fuss about nothing. Maybe retirees are just happy having a tidy sum that they can eventually bequeath to their heirs.

One of the superannuation fund administrators pointed out that we tend to oversimplify the process of spending in retirement: Just as people have many needs along the way as they accumulate money for retirement, so the path to decumulation is not likely to be one-size-fits-all but instead quite heterogeneous.

EBRI’s Retirement Security Research Center (RSRC) has identified this exact dynamic as it has explored drawdown behavior in mining its empirical 401(k) and individual retirement account (IRA) databases and in examining data from the Health and Retirement Study. Members of the RSRC have concluded that it could help to develop retirement “personas” in order to identify the finite set of approaches that people take to spending down their assets — and to thereby best identify products, services, education, and policy that can support them. This could also involve adding a qualitative aspect to the research as well by actually talking to retirees about why they engage in the behaviors they do.

This is exciting work and immensely valuable: People both in Australia and in the United States work very hard for their earnings. They deserve to be able to spend it optimally throughout their lifetime. Of course, that also involves developing a consensus around what “optimal” means on an individual/household basis — as well as from a societal standpoint.


[1] https://www.superannuation.asn.au/resources/superannuation-statistics

[2] Andrew Reeson, Thomas Sneddon, Zili Zhu, Alec Stephenson, Elizabeth V. Hobman, Peter Toscas. “Superannuation drawdown behaviour: An analysis of longitudinal data.” Canberra: CSIRO-Monash Working Paper, May 2016.

[3] More specifically, EBRI’s 2018 Issue Brief found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent. Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median. https://www.ebri.org/publications/research-publications/issue-briefs/content/asset-decumulation-or-asset-preservation-what-guides-retirement-spending

Will Small Employers Widely Adopt More Accessible Multiple Employer Plans?

Blog9.20President Trump’s August 31 Executive Order (EO) on Strengthening Retirement Security in America could be a game changer for the retirement prospects of workers at small businesses. According to the Bureau of Labor, while 89 percent of workers of larger employers (500 or more employees) have access to retirement plans, for workers at smaller employers (less than 100 employees) that proportion drops to 53 percent¹. This clearly contributes to the $4.13 trillion aggregate retirement savings shortfall that EBRI estimates American workers face, according to its Retirement Security Projection Model.®

First, some background: Why do small employers refrain from offering retirement plans? Cost is a key factor. A Pew Charitable Trusts survey found that the top reason small business owners give for not offering a retirement plan is cost (followed by resources).² More widely available multiple employer plans (MEPs) could alleviate cost burdens by allowing small employers to band together and gain economies of scale. Trump’s EO calls for expanding access to multiple employer plans by addressing issues that have prevented widespread adoption of such plans. Namely, the EO instructs the Secretary of Labor to consider new rules around when a group or association of employers qualify for a MEP (the “common nexus” requirement). It asks the Secretary of the Treasury to consider amending regulations to address consequences if employers within MEPs fail to meet plan requirements (the “one bad apple” rule).

Whether both the common nexus and one bad apple rules can be properly addressed is the subject of a different blog. Further, we’ll let others assess whether the hoped-for economies of scale will actually materialize. But assuming the answer to all of the above is “yes,” a further question is: Will small employers adopt more widely available MEPs?

The data are mixed. In one provider survey, 33 percent of small employers (5–99 employees) indicated that they would be likely to consider a MEP if easily accessible. Meanwhile, the Transamerica Center for Retirement Studies finds that among companies that say they are not likely to offer a 401(k) plan — many of which cite not being big enough — a quarter would consider joining such a MEP.³ However, 23 percent were “somewhat likely” to do so — only 2 percent said they were “very likely.” The Transamerica study also points out that less than a third of employers view an employee-funded retirement plan as very important in attracting and retaining employees.
At the same time, among small companies that do not offer a 401(k) or similar plan, Pew found that about a quarter were likely to begin sponsoring a plan in the next two years — and this was before the EO. It is possible that a MEP gives such plan sponsors an easier pathway to offering benefits, allowing them to more easily change their intentions into action. And indeed, nearly half of those in the study said that availability of a plan with reduced administrative requirements would increase the likelihood of their organization offering a retirement plan in the future.

Assuming that a third of small employers that do not currently offer DC plans adopt MEPs going forward, preliminary estimates from EBRI’s Retirement Security Projection Model® indicate that the $4.13 trillion aggregate retirement savings shortfall would be reduced by $65 billion.

But this assumes 100 percent participation among eligible employees, and that small businesses joining MEPs will implement plans that look similar to existing plans of companies of their size. The majority of small employers, according to the Pew survey, do not offer automatic enrollment or automatic contribution escalation, although many offer employer contributions. If cost is truly the reason small employers don’t currently offer such plans, it is possible that fewer employers that participate in MEPs will offer employer contributions than average. Without automatic enrollment and automatic contribution escalation, participation in such plans may be low.

Importantly, in the Transamerica survey, 88 percent of workers believed that the value of a 401(k) or similar plan is an important benefit, and 81 percent agreed that retirement benefits offered by a prospective employer were a major factor in the final decision to accept a job.

Other possible proposals and alternatives to increase coverage exist:

  • President Obama’s proposed Automatic IRA program: estimated to reduce the retirement savings shortfall by $268 billion4.
  • The Automatic Retirement Plan Act (ARPA) of 2017: estimated to decrease the deficit by $645 billion5.
  • Universal DC plans: estimated retirement savings shortfall would decline by $802 billion6.

1March 2017
2Small-Business Views on Retirement Savings Plans: Topline Results of Employer Survey. 2016 Pew Charitable Trusts report.
3Striking Similarities and Disconcerting Disconnects: Employers, Workers, and Retirement Security. 18th Annual Transamerica Survey. August 2018.
4Under the Obama proposal, the model assumes a 3 percent default contribution rate and no opt-outs. It further assumes that there were no employer contributions and that no current defined-contribution-plan sponsors decided to discontinue their current plan and shift to the auto-IRA.
5ARPA assumes triennial automatic enrollment with a default contribution rate of 6 percent, and auto contribution escalation at 1 percent per year [up to 10 percent]. Assumes no opt-outs for this calcuation.
6This analysis assumes that all employers offer a type of plan and a set of generosity parameters similar to employers in their size range. Assumes observed contributions and opt-outs.

Lessons Learned

 

Nevin AdamsBy Nevin Adams, EBRI

I joined EBRI with a passion for the insights that quality research can provide, and a modest concern about the dangers that inaccurate, sloppy, and/or poorly constructed methodologies and the flawed conclusions and recommendations they support can wreak on policy decisions.  While my tenure here has only served to increase my passion for the former, on (too) many occasions I have been struck not only by the breadth of assumptions made in employee benefit research, but just how difficult – though not impossible – it is for a non-researcher to discern those particulars.

We have over the past couple of years devoted some of this space to highlighting some of the most egregious instances, but as I close this chapter of my professional career, I wanted to share with you a “top 10” list of things I have learned in my search to find reliable, objective, actionable research:

There are always assumptions in research; find out what they are. Garbage in, garbage out, after all (the harder you have to look, the more suspicious you should be).

Just because research validates your sense of reality doesn’t make it “right.” But just because it invalidates your sense of reality doesn’t necessarily make it right, either.

Take the conclusions of sponsored research with a grain of salt.

Self-reported data can tell you what the individual thinks they have, but not necessarily what they actually have.

Sample size matters. A lot.

“Averages” (e.g., balances/income/savings) don’t generally tell you much.

There’s a certain irony that those who propose massive changes in plan design, policy, or tax treatment, frequently assume no behavioral changes in response.

When it comes to research findings, “directionally accurate” is an oxymoron.

In assessing conclusions or recommendations, it’s important to know the difference between partisan, bipartisan and nonpartisan.

In an employment-based benefits system, the ability to accurately gauge employee response to benefits change is dependent on the reaction of the employers who provide access to those benefits.

One of the things that I’ve always loved about the field of employee benefits was that there was always something new to learn, and with each position along the way I have gained a new and fresh perspective.  I’ll always treasure my time here as a member of the EBRI team, the opportunity I’ve had to contribute to this body of work – and I’m looking forward to continuing to draw on EBRI research for insights and analysis in my new position, as I have for most of my professional career.

That said, I’ll close by commending to your attention one of my favorite “lessons” – a quote attributed to Mark Twain, and one worth keeping in mind along with the 10 “lessons” above:

“It’s easier to fool people than to convince them they have been fooled.” 

Here’s to not being fooled.

Direction-Less?

Adams

Adams

By Nevin Adams, EBRI

Generalizations are often misleading, but I think it’s fair to say that some people (specifically among those of the male gender) are notoriously reluctant to ask for directions—even when it’s painfully clear to everyone else traveling in their company that they are “lost.” If you’re not one of those people, I’ll bet you know someone (and probably more than one someone) who is.¹

The rationalizations offered by those refusing to seek help are as varied and variable as the individual circumstances that bring those hesitations to light: a shortage of time; certainty that, however lost they seem, they actually know where they are (or will be shortly); a lack of trust in the reliability of the instructions they might receive; the inconvenience of stopping…this despite the knowledge (frequently even among those reluctant to ask directions) that the modest investment of time to seek assistance will likely be far less than the time (and aggravation) that they will expend trying to find their own way.

When it comes to retirement planning, reluctance to seek help seems even more widespread. In fact, the 2013 Retirement Confidence Survey found that fewer than half of workers surveyed have ever tried to calculate what they need to save for a comfortable retirement (see “Guess Work?”)—and that’s not a new finding in a survey that now spans nearly a quarter-century.

The use of retirement planning “help,” in the form of on-line calculators and professional retirement advisors, has been linked to higher levels of retirement confidence—and with justification, according to new EBRI research.³ Turns out that the respondents to the 2013 Retirement Confidence Survey² in the lowest-income quartile who had sought the input of a financial advisor cited savings goals that, compared with those who did not, would reduce the risk of running short of money in retirement by anywhere from 9 to nearly 13 percentage points, depending on family status and gender. Those in the lowest-income quartile who used calculators chose savings targets that would, if they achieved those goals, decrease their probability of running short of money in retirement by anywhere from 14 to more than 18 percentage points.

Unfortunately, only about one-fourth of the sample studied (25.6 percent) used either of these two methods.

Why, then, have so few sought direction? Doubtless the reasons for not doing so mirror those above: a lack of time, a lack of confidence in the directions, or in the individual providing that assistance. Perhaps in the case of retirement projection calculators, the tools may be too hard to find, too complicated to use, or simply just one thing too much to do in an already too-busy day. This, it seems fair to say, despite the knowledge that seeking help would surely provide a better outcome.

What about those who didn’t seek help, who “guessed” at those retirement savings targets? Well, there were more in that category in the RCS sampling (44.6 percent)—and, perhaps not surprisingly, they tended to underestimate their savings needs—in effect, citing a goal that would leave them short of their projected financial needs in retirement.

Baseball great Yogi Berra once cautioned that “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” When it comes to retirement, the problem generally isn’t getting there—it’s getting there before you are ready.

Notes

¹ These individuals may be harder to spot these days with the widespread availability of GPS devices, but they can still be found.

² See the 2013 RCS, on-line here.

³ “A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey” on-line here.

Consumer-Driven Health Plan Participants More Cost-Conscious

Adults in a consumer-driven health plan (CDHP) were more likely than those in a traditional plan to exhibit a number of cost-conscious behaviors, according to new research from EBRI.

While CDHP enrollees, high-deductible health plan (HDHP) enrollees, and traditional-plan enrollees were about equally likely to report that they made use of quality information provided by their health plan, CDHP enrollees were more likely to use cost information and to try to find information about their doctors’ costs and quality from sources other than the health plan, according to the report. Moreover, CDHP enrollees were more likely than traditional-plan enrollees to take advantage of various wellness programs, such as health-risk assessments, health-promotion programs, and biometric screenings. In addition, financial incentives mattered more to CDHP enrollees than to traditional-plan enrollees.

More Americans are continuing to enroll in so-called “consumer-driven” health plans: In 2012, 12 percent of the population was enrolled in a CDHP, up 3 percentage points from last year, according to the new EBRI research, while enrollment in so-called “high deductible” health plans was unchanged, at 16 percent, EBRI found. HDHPs have lower premiums but higher deductibles (at least $1,000 for employee-only coverage) than traditional health plans.

“It is clear that the underlying characteristics of the populations enrolled in these plans are different,” noted Paul Fronstin, director of EBRI’s Health Research and Education Program and author of the report. “Adults in a CDHP were significantly more likely to report being in excellent or very good health, and they were significantly more likely to exercise.” He noted that those in a CDHP and those in a HDHP were significantly less likely to smoke than were adults in a traditional plan—and that CDHP and HDHP enrollees were also more likely than traditional-plan enrollees to be highly educated.

The full report is published in the December EBRI Issue Brief, online at www.ebri.org

“Keep” Sakes

By Nevin Adams, EBRI

Nevin Adams

Nevin Adams

Ask any benefits manager why their organization offers benefits to their workers, and my experience suggests that the reliably consistent answer is “to attract and retain the best workers.”

Indeed, as the 2013 Health and Voluntary Workplace Benefits Survey (WBS)¹ bears out, the benefits package that an employer offers prospective employees is an important factor in their decision to accept or reject a job. In fact, a full third of employees say the benefits package is extremely important, and another 45 percent say it is very important. Moreover, a quarter of employees report they have accepted, quit, or changed jobs because of the benefits—other than salary or wage level—that an employer offered or failed to offer.²

However, the WBS also found that many workers are not especially satisfied with the benefits package offered by their employer: 31 percent are only somewhat satisfied, and one-quarter are not too satisfied (12 percent) or not at all satisfied (14 percent).

It is, of course, entirely possible that these workers are genuinely dissatisfied with the options provided by their employer. On the other hand, the WBS found that a substantial minority of employees may be confused about the benefits their employer offers and who pays for them—a level of ignorance that belies the time and expense often undertaken by employers in making those offerings available.

Employers increasingly look not only to attracting and retaining a qualified workforce, but (at an appropriate time and place), to helping an aging workforce migrate into retirement—a process that can be assisted by a well-crafted benefit program. And it’s not surprising that workers see value in offering additional voluntary benefits to those nearing retirement age.

In fact, the WBS finds that large majorities of workers say they think the following products and services would be extremely or very valuable to workers nearing retirement age:

  • An annuity product that makes guaranteed monthly lifetime payments (83 percent).
  • Life insurance that pays benefits to the surviving spouse, helping to replace income from Social Security or other sources that is discontinued when a worker dies (77 percent).
  • Retirement planning that includes assistance with deciding when to retire, when to claim Social Security benefits, what Medicare option to choose, and how to set up a stream of income for retirement (76 percent).
  • Long-term care insurance (71 percent).

During my working life, there have been times when I didn’t care much about certain aspects of the benefits package. As a young, single individual, I focused primarily on salary and vacation—cared less about health care insurance than I should have, while retirement benefits, even for someone who worked with them every day, were distant prospects. As my family grew, my priorities (and those that I assigned to various benefits) shifted. It was still presented as a package, of course, but the various components mattered more or less depending on my personal situation.

Ultimately, employers looking to keep the best workers committed and engaged know that benefits, like workers, have a life cycle, and that programs designed to keep the best workers are not only well-designed for those various life stages, but (as the WBS reinforces) are well-communicated and reinforced throughout a worker’s career.

Notes

¹ The 2013 Health and Voluntary Workplace Benefits Survey (WBS) was conducted by EBRI and Greenwald & Associates. Additional information can be found online here.  If you’d like to become an underwriter of this important survey, please contact Nevin Adams at nadams@ebri.org, or Paul Fronstin at fronstin@ebri.org

² “Views on the Value of Voluntary Workplace Benefits: Findings from the 2013 Health and Voluntary Workplace Benefits Survey,”, can be found in the November 2013 EBRI Notes article online here.

Foregone “Conclusions”

By Nevin Adams and Jack VanDerhei, EBRI

Adams

Adams

VanDerhei

Behavioral finance drives much of the discussion around retirement plan design innovations these days, for the very simple reason that it seems to help explain what might otherwise be viewed as irrational behaviors. For example, human beings are prone to something that behaviorists call “confirmation bias,” a tendency to favor information that confirms what we already believe. While doing so generally contributes to quicker assessments of information, there are some obvious shortcomings to that approach in terms of critically evaluating new information, particularly information that contradicts what we have already chosen (rightly or wrongly) to accept as reality.

Last month EBRI published an analysis of a direct comparison of the likely benefits under specific types of 401(k) plans and defined benefit (DB) pension plans.(1) As anyone who has worked with employment-based retirement plans knows, individual participant outcomes can vary widely based on a complex combination of decisions by both those that sponsor the plans and the individual workers who are eligible to participate in them, as well as a host of external factors (notably the investment markets) that lie outside their control.

The EBRI report took pains to not only select but to explain the key assumptions in our analysis. As it turns out, the analysis highlighted a number of circumstances in which traditional pensions (where offered) could produce a higher benefit at retirement—and some in which 401(k)s were superior in that regard.

However, some of the reporting and commentary that followed its publication suggest that some either did not read with care the entire analysis, or chose to ignore the totality of the report. Here, in a Q&A format, we deal with most of the mischaracterizations(2) we’ve seen thus far:

  • Did the report conclude that 401(k) benefits were better for almost every age and income cohort?

♦ No. While an analysis of just the median results for just the baseline assumptions might suggest this conclusion, the EBRI Issue Brief followed with seven different sensitivity analyses with different assumptions that produce different results. Moreover, the entire analysis was restricted to employees currently ages 25–29, because those individuals would have the opportunity for a full working career with those 401(k)s, as well as the modeled defined benefit results.

  • Did the study make assumptions that are biased toward 401(k)s?

♦ Quite the contrary. The baseline used historical averages and ran many sensitivity analyses that were biased AWAY from 401(k)s to test how robust the results were.

  • Why did you exclude automatic enrollment designs in 401(k) plans from the analysis?

♦ While a great many employers have adopted automatic enrollment with automatic escalation provisions in recent years, sufficient time has not yet passed since the establishment of most of these escalation features to know how long, and to what levels, participants will allow the escalation provisions to continue before they opt out.

  • How does excluding those automatic enrollment plan designs from the analysis impact the results?

♦ Some have argued that automatic enrollment is actually bad for retirement savings because, in some cases, the AVERAGE rate of deferral—when computed only for those who make a contribution—initially decreases.(3) However—and as previous EBRI research has documented—the decline in average deferrals masks the reality that while some individuals initially save at lower rates (certainly in the absence of provisions to increase those initial rates automatically), many lower-income workers become savers under an automatic plan design who would not contribute anything had they been eligible for a voluntary-enrollment 401(k) plan instead.

♦ The June 2013 Issue Brief(4) specifically treats these individuals as making zero contributions and does NOT simply exclude them. This is the major reason why low-income employees do not do as well as high-income employees under THIS TYPE of 401(k) plan. EBRI has done previous analysis(5) showing the difference between automatic-enrollment and voluntary-enrollment types of 401(k) plans and specifically documents how much better automatic enrollment was for the retirement savings of lower-income cohorts.

  • Aren’t workers today changing jobs more frequently than they did during the heyday of defined benefit pensions?

♦ Actually, no. While it was not an explicit part of this report, a recent EBRI Notes article points out that the data on employee tenure (the amount of time an individual has been with his or her current employer) show that so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years. While the new analysis focused on the outcomes for younger workers, including the implications of their tenure trends on DB accumulations, the historical turnover trends suggest that this would have been problematic for full DB accumulations among previous generations of workers as well.

  •  Were the rates-of-return scenarios “realistic” for 401(k) participants?

♦ The EBRI analysis presented baseline results under historical return assumptions that were adjusted for expenses by reducing the gross return by 78 basis points. Additionally, sensitivity analysis was also conducted in this study by reducing the returns by 200 basis points to determine the robustness of the findings.

  • What about the fact that private-sector pensions are largely funded exclusively by employers, while much of that burden falls on individual workers in 401(k) plans?

♦ The report acknowledges this difference, but as the title of the Issue Brief specifically states, this is a comparative analysis of future benefits from private-sector voluntary enrollment plans vs. two stylized types of defined benefit plans—not the financial impact on the individual participants during the accumulation period, or how he/she might deploy assets not committed to retirement savings. However, as both the academic papers cited in the Issue Brief state, a comparison of ALL aspects of this difference would likely need to incorporate the assumption that more costly employer contributions to a plan (whether defined benefit or 401(k)) will be at least partially offset by lower wages over the long run, everything else equal.

  • Is it reasonable to compare defined benefit and 401(k) plan benefits?

♦ Retirement income adequacy studies have been undertaken in several reports by other organizations with the implicit assumption that 401(k) plans are unable to generate the same amount of retirement income (regardless of the source of financing). One of the primary objectives of the June EBRI Issue Brief was to actually test whether these implicit assumptions were correct.

So, which is “better”—a defined benefit plan or a 401(k)?

Well, as was noted in the Issue Brief, there is no single answer because a multitude of factors affect the ultimate outcome: interest rates and investment returns; the level and length of time a worker participates in a retirement plan; an individual’s age, job tenure, and remaining length of time in the work force; and the purchase price of an annuity, among other things.

The best answer depends on an incorporation of all the relevant factors, the tools to provide a thorough analysis, and an open mind with which to consider the results.

Notes

(1) Jack VanDerhei, “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans,” online here.

(2) For example, see “Claim that 401(k)s Beat Defined Benefit Plans Stirs Controversy,” online here.

(3) This is the same type of mistake made in a 2011 Wall Street Journal article. See the EBRI blog “What Do You Call a Glass That is 60−85% Full?” as well as  “More or Less?”

(4) “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans,” online here.

(5) See Jack VanDerhei and Craig Copeland, “The Impact of PPA on Retirement Savings for 401(k) Participants.” Washington, DC: EBRI Issue Brief, no. 318, June 2008, online here.

The Common Denominator: Understanding the Importance of Commonality When It Comes to Retirement Advice

In my recent testimony on “Gaps in Retirement Savings Based on Race, Ethnicity and Gender” for the U.S. Department of Labor Advisory Council on Employee Welfare and Pension Benefit Plans, one of the key discussion points was the importance of “commonality.” Specifically, “2021 Retirement Confidence Survey (RCS): A Closer Look at Black and Hispanic Americans” found that — when looking for an advisor — Black and Hispanic Americans were asked if “working with an advisor who has had a similar upbringing or life experience as you” was an important criterion: 61 percent of Black respondents and 57 percent of Hispanic respondents, vs. 41 percent for White respondents, said this criterion was important.

However, one cohort that expressed less interest in having an advisor with a similar upbringing or life experience was female workers, with 45 percent saying this was important. Also of less importance to female workers was whether the advisor was the same gender as them: Only 27 percent said this was important, compared with 39 percent of males.[1]

This may bear some further investigation. In “2020 Retirement Confidence Survey: Attitudes Toward Retirement by Women of Different Marital Statuses,” we examined responses of women by marital status and found that while married women workers listed a professional financial advisor as one of the top three sources of information they use for retirement planning, financial advisors were not among the top three listed for divorced or never-married women — who instead used family and friends, Google, or none of the above.

Part of this finding may owe to the fact that divorced and never-married women have substantially less assets than their married female counterparts: 38 percent of divorced and 42 of never-married women workers had less than $1,000 saved, compared with 14 percent of married women workers. The divorced women workers were markedly more likely to have smaller levels of assets, as 72 percent had less than $25,000 in assets vs. 54 percent for never-married women workers and 31 percent for married women workers. Not surprisingly, given their low levels of assets, divorced women workers expressed far more interest in access to emergency savings accounts or programs to help with near-term needs than long-term savings help. 

The 2022 Retirement Confidence Survey will continue to explore differences in savings and retirement by gender. We will also oversample LGBTQ+ workers and retirees to further understand how various cohorts are approaching saving for and living in retirement. Please consider partnering with EBRI on this important work and sponsoring the 2021 Retirement Confidence Survey: Focus on Gender, Marital Status, and the LGBTQ Community.  Contact jaffe@ebri.org.


[1] From the 2021 RCS Funders Report, which is available only to sponsors of the RCS.

Getting the “S” Right: It Stands for Spending in FSAs and Saving in HSAs

On a vintage “Weekend Update” segment on Saturday Night Live, Emily Litella expresses outrage about trying to limit violins on television: “Why don’t parents want their children to see violins on television?” Litella says. “I say there should be more violins on television.” It’s up to Chevy Chase to gently explain to her that the concern is not violins, but violence, on television. “Oh, that’s different.” Litella concludes.

As the Employee Benefit Research Institute (EBRI) rolls out its new FSA Database, we hearken back to this skit for a reason: Much like Litella confused violins and violence, people have long confused FSAs and HSAs.

Image courtesy of http://401kcalculator.org

HSAs, or health savings accounts, are savings vehicles. Balances can accrue in HSAs over time, allowing owners to use them as a type of retirement vehicle if they so choose. In contrast, FSAs — or flexible spending accounts — are a type of benefits cafeteria plan. They are meant to be spent down every year, and, in fact, monies not used to pay out-of-pocket health care expenses each year from FSAs are forfeited.[i]

The reason many believe that “optimal” HSA usage involves maximizing HSA wealth at retirement is because HSAs benefit from a triple tax benefit: Employee contributions to the account are deductible from taxable income, any interest or other earnings on assets in the account build up tax free, and distributions for qualified medical expenses are excluded from taxable income to the employee. For years, however, EBRI’s database has suggested “sub-optimal” utilization of HSAs — possibly, in part, because of the HSA/FSA confusion.

The EBRI HSA Database was started in 2014 and contains 10.5 million accounts accounting for $28.1 billion in assets, or 40 percent of the HSA universe as of 2019. The database allows EBRI to examine individual and employer HSA contributions, balances, distributions, transfers, and investments.

What have we learned? In our report on 2019 HSA utilization, we found that nearly 40 percent of accountholders in EBRI’s HSA Database withdrew more than they contributed. Very few accountholders contributed the statutory maximum in 2019, and only 7 percent of accountholders held assets other than cash in their HSAs. These are not the behaviors of individuals seeking to maximize HSA wealth for retirement.

Of course, there are many reasons people may choose not to use HSAs as retirement vehicles, including the fact that they may not be able to afford to pay health expenses out of pocket without tapping their HSA. But the HSA data did lead us to conclude that there are opportunities to improve accountholder engagement with HSAs. For instance, because accounts with employer contributions tended to have higher total contributions and more frequently contained investments other than cash, we were able to conclude that employers can play a crucial role in fostering employee engagement with their HSAs.

So, what does the new FSA Database tell us so far? A representative repository of information about individual FSAs, the database includes 460,000 flexible spending accounts with $563 million in contributions. According to the inaugural Fast Fact from the database, the average worker contributed $1,179 to their FSA in 2019 — which is below the $2,700 limit. Nonetheless, 44 percent of workers forfeited part or all of their contributions in 2019. Among those forfeiting part or all of their contributions, the average forfeiture was $339 and the median forfeiture was $157. As such, one clear conclusion is that there are opportunities for employers to better educate and facilitate fully spending down FSA contributions and avoiding forfeitures.

It is EBRI’s hope that the new FSA Database, along with EBRI’s existing HSA Database, will allow us to continue to shed light on how these vastly different accounts are being utilized. This will allow plan sponsors, providers, and policymakers to better understand how these vehicles are providing benefits to employees — as well as identifying any Emily Litella-like mistakes that may be occurring in their utilization with a goal of improving outcomes.


[i] Employers can let workers roll over $500 of their FSA.  It is also worth noting that the December 2020 stimulus bill gives employers options to give workers more flexibility to get around the “use-it-or-lose-it” rule.