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 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.

ERISA’s 40th Birthday—Private Plan Performance

Salisbury

Salisbury

By Dallas Salisbury, EBRI

This week marks the 40th Labor Day since President Ford signed the Employee Retirement Income Security Act of 1974 into law. ERISA has been amended many times since then—as have Internal Revenue Code provisions that relate to ERISA-covered employee benefit plans. Private-sector regulatory change has come as well, via the Financial Accounting Standards Board. The U.S. and global economies, trade and employment have changed continuously over this 40 years, as has the general societal view of individual responsibility

I will leave to others conclusions on why things have gone as they have, but will provide four data pictures of the 40 years of ERISA—and by coincidence, my entire career in the benefits world—which has revolved around ERISA and employee benefits.

Chart 1

Chart 1

Chart 1 shows income sources in 1975 as reported by the Current Population Survey. Many describe the 70’s and earlier as the “good old days” for retirement: 25% of those over 65 in 1975 reported pension income. Some had both private and public pension income, with 16.9% reporting private pension income and 8.2% reporting public pension income. A central intent of ERISA was to increase the number of workers who would have private pension income in the future.

This was to be accomplished with new standards for retirement plan participation and vesting that would increase the number of plans in which workers would participate, and to increase the number of workers who would gain a non-forfeitable right to a benefit. Chart 2 shows that sponsorship has steadily increased, that participation as a percent of all workers has not, but that the increase in workers with non-forfeitable benefit rights has been achieved.

Chart 2

Chart 2

Research undertaken by EBRI since 1978 documents the change. Today our unique databases and our Retirement Security Projection Model® and the EBRI Retirement Readiness Rating™ it produces indicate that the financial well-being delivered by the voluntary private-sector system will continue to provide significant supplementation to Social Security  in the decades ahead (unless legislative or regulatory changes or economic changes that cannot be predicted tear things apart).

Why have the ERISA (and amendments) vesting rules made such a difference? Because of short job tenure: Most U.S workers have never worked long careers with one employer (or in one industry that might have a multi-employer plan). Chart 3 shows that median labor force tenure has changed little for workers under the age of 44 over the life of ERISA. It has shortened a bit more for workers 46‒54, and significantly for workers 55‒64, such that the vesting standards in ERISA have been exceedingly important.

Chart 3

Chart 3

Chart 4 shows from 1983 forward (data collection has become more robust over time), that among public- and private-sector workers 45-64 the percentage with 25 or more years of tenure in both sectors is quite low, with nearly 4/5ths of the population experiencing tenures that are less than a “full career” with one employer. Data in Chart 5 on long tenure can be examined by sector, and shows that public-sector workers have significantly more full careers with one employer than is true in the private sector.

Chart 4

Chart 4

ERISA at 40—What we know as facts is that:

♦ There are about 700,000 plans today as compared to 300,000 when ERISA was enacted.

♦ The proportion of workers who are active retirement plan participants has increased from under 40 million to over 85 million, and that it is about the same proportion of the workforce as it was in 1975.

♦ The proportion of participants gaining vested benefits has more than doubled, as vesting periods have grown shorter, with 46% of workers participating and 43% of workers having vested rights.

♦ We know that total plan assets, average plan assets by various demographics, the proportion of those over 65 with income and/or accumulated wealth that is attributable to their prior vested participation in ERISA plans has grown every year. And it continues to grow, according to data from the IRS, the Federal Reserve, the Department of Commerce Income and Product Accounts, the Department of Commerce Bureau of the Census, and administrative data of plans themselves.

♦ And we know that the PBGC is paying benefits to millions of retirees because this ERISA-created agency exists.

Chart 5

Chart 5

There is no way to know where we would be had ERISA never been enacted, but data clearly tells us where we were and where we are.

These advancements in the financial well-being of retirees and future retirees are the legacy of a voluntary system that has flexed with changes in the economy, with workforce changes, working alongside Social Security, and other in-kind income and benefit programs from the government, and from other voluntary programs. OECD, World Bank, and other international comparisons document that the post-ERISA U.S. system is one of the best-funded and most stable in the world, when judged against voluntary programs working in combination with annuity-paying public social insurance programs elsewhere. Comparisons to other nations with only mandatory programs produce a less favorable picture when looking at the issue of retirement narrowly, but looking more broadly at the overall economic state of nations and populations, the U.S. retirement system certainly ranks near the top of the heap.

Younger persons than I will have to write about ERISA at 80, but I hope to still be writing about it at 50 and 60. If I live a year longer than my parents, I will even write a perspective in 2044, as I celebrate the beginning of my 95th year—and ERISA marks birthday 70. Stay tuned.

Note: To read more about ERISA at 40, see this PlanSponsor interview, online here.

 

Look-Back “Provisions”

Nevin AdamsBy Nevin Adams, EBRI

My wife and I recently celebrated our wedding anniversary.  It was a special day, as they all are, but as I thought back on the events of our life together, I was struck by the realization that I have now been married for about half my life.  Not that I didn’t expect to remain married, or to live this long; if someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes.  However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing, or what my income would be (or need to be)—well, my responses would likely have been much less certain.

In just a few weeks we’ll be making preparations to launch the 2015 Retirement Confidence Survey (RCS)[i].  It is, by far, the longest-running survey of its kind in the nation.  Indeed, this will be its 25th year.  Think for a moment about where you were a quarter century ago, what (or if) you thought about retirement, what preparations you had made… then consider for a moment what you have done in the years since.  Are you where you thought you would be?  Are you more – or less – confident about your prospects for a financially secure retirement?  Have you planned toward a specific retirement date or age?  Has that changed over the years – how, and why?

Through the prism of that near-quarter-century window, the RCS provides a unique perspective to view in the here and now, and to look back over time on how American workers – and retirees – have viewed their preparations, readiness, and confidence about retirement.  It has also provided those who are working to help improve and/or ensure those prospects insights into those collective preparations, or lack thereof. Moreover, the RCS has offered the ability to gauge potential responses to specific regulatory, administrative and legislative alternatives, both real and envisioned – a critical real-world filter to balance the theoretical world in which academics often imagine we live and respond, or as they often assume, won’t respond[ii].

Retirement confidence is, of course, a state of mind at a point in time, unique to individual situations, and as past waves of the RCS have shown, it’s not always based on a realistic assessment of where you are or what lies ahead.  That said, the RCS offers more than a sentiment snapshot, and those who look not only to feel better about retirement but to have a basis for that feeling need look back no further than the pages of that report.

The RCS has outlined the impact that real-world actions can have on confidence: having saved for retirement, having sought professional investment advice, having made a determination as to how much is needed for retirement, and – as last year’s RCS findings emphasized — having some kind of retirement savings account.  Little wonder that those who have undertaken those steps are more confident of the outcomes.

It’s one thing to anticipate that eventual cessation of paid employment, and something else altogether to make the preparations – to choose to save – and to be confident that you’ll be able to look back with satisfaction one day knowing that you have the financial resources to enjoy it.

  • Notes

Your organization can be part of the 25th Retirement Confidence Survey.  Survey underwriters serve as a member of the survey’s Advisory Board, along with the opportunity to participate in the review and update of the 2014 questionnaire; have the opportunity to participate in a pre-release, underwriters’ briefing on the results of the survey; are able to utilize the survey materials and findings for your research, marketing, communications, and product-development purposes – and you’ll be acknowledged as an underwriter of this, the 25th Retirement Confidence Survey, among other benefits.  For more information, contact us at nadams@ebri.org.

 

[i] More information about the Retirement Confidence Survey is available online here.

[ii] See “The Status Quo.”

The Status Quo

Nevin AdamsBy Nevin Adams, EBRI

While the prospects for “comprehensive tax reform” may seem remote in this highly charged election year, the current tax preferences accorded employee benefits continue to be a focus of much discussion among policymakers and academics.

The most recent entry was a report by the Urban Institute which simulated the short- and long-term effect of three policy options for “flattening tax incentives and increasing retirement savings for low- and middle-income workers.”  The report concluded that “reducing 401(k) contribution limits increases taxes for high-income taxpayers; expanding the saver’s credit raises saving incentives and lowers taxes for low- and middle-income taxpayers; and replacing the exclusion for retirement saving contributions with a 25 percent refundable credit benefits primarily low- and middle-income taxpayers, and raises taxes and reduces retirement assets for high-income taxpayers.”

However, and to the authors’ credit, the report also noted that “the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates[i].”

In previous posts, we’ve highlighted the dangers attendant with relying on simplistic retirement modeling assumptions, the application of dated plan design information to future accumulations, and the choice of adequacy thresholds that, while mathematically accurate, seem unlikely to provide a retirement lifestyle that would, in reality, feel “adequate.”

However, one of the more pervasive assumptions, particularly when it comes to modeling the impact of policy and/or tax reform changes, is that, regardless of the size and scope of the changes proposed, workers – and employers – will generally continue to do what they are currently doing, and at the current rate(s), for both contributions and/or plan offerings.  Consequently, there is talk of restricting participant access to their retirement savings until retirement, with little if any discussion as to how that might affect future contribution levels, by both workers and employers, and there are debate about modifying retirement plan tax preferences as though those changes would have no impact at all on the calculus of those making decisions to offer and support these programs with matching contributions.  Ultimately, these behavioral responses might not only impact the projected budget “savings” associated with the proposals, but the retirement savings accumulations themselves.

EBRI research has previously been able to leverage its extensive databases and survey data (including the long-running Retirement Confidence Survey) to both capture  potential responses to these types of proposals and, more significantly, to quantify their potential impact on retirement security today and over the extended time periods over which their influence extends.  In recent months, that research has provided insights on the full breadth of:

  • A retirement savings cap[ii],
  • The proportionality of savings account balances with incomes[iii], and
  • The impact of permanently modifying the exclusion of employer and employee contributions for retirement savings from taxable income, among other proposals[iv].

While we can’t be certain what the future brings, considering the likely responses to policy changes is a critical element in any comprehensive impact assessment – not only because the status quo is rarely a dependable outcome, but because, after all, those who assume the status quo are generally looking to change it.

  • Notes

[i] From Urban Institute and Brookings Institution:  Flattening Tax Incentives for Retirement Saving“Our findings should be interpreted with caution. Actual legislation for flattening tax incentives requires more than the simple adjustments discussed here. For instance, if a credit-based approach is used, then the laws would need to ensure some recapture of those benefits for those who made contributions one year and withdrew them soon thereafter.

Additionally, the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates. For instance, employees may save more in response to improved incentives, in which case the benefits to low lifetime income households would be greater than we find. On the other hand, employers might reduce their contributions in response to some of the policy changes outlined. In this case, the tax and savings benefits we find would be overstated.  While our policy simulations are illustrative, addressing these behavioral responses would be a chief concern in tailoring specific policies to create the best incentives.”

[ii] See “The Impact of a Retirement Savings Account Cap

[iii] See “Upside” Potential

[iv] See “Tax Reform Options: Promoting Retirement Security”, and “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances

“Free” Money?

Nevin AdamsBy Nevin Adams, EBRI

While I appreciate the convenience of gift cards, giving them always feels a bit lazy. As a recipient, however, I very much appreciate the flexibility and the freedom to buy, within the limits of the card, pretty much anything—sometimes things for which I wouldn’t even have thought to ask much less buy for myself. And, arguably, in at least a couple of cases, things I SHOULDN’T have bought, and probably wouldn’t have bought, if it hadn’t felt like “free” money.

That very human inclination to spend our own money more judiciously than what we are given underpins the growing interest in consumer-directed health plans, such as the now decade-old health savings account (HSA), or its slightly older cousin, the health reimbursement arrangement, or HRA[i]. Both are designed to provide workers the ability to pay for health care-related expenses with funds drawn from the account – and yet, EBRI’s 2013 Consumer Engagement in Health Care Survey (CEHCS)[ii] found evidence that adults with an HSA were more likely than those with an HRA to exhibit a number of cost-conscious behaviors related to use of health care services.

Specifically, the analysis found that those with an HSA were more likely than those with an HRA to:

  • report that they asked for a generic drug instead of a brand name (52 percent HSA vs. 49 percent HRA);
  • check the price of a service before getting care (41 percent HSA vs. 34 percent HRA);
  • ask a doctor to recommend less-costly prescriptions (40 percent HSA vs. 38 percent HRA);
  • develop a budget to manage health care expenses (32 percent HSA vs. 22 percent HRA); and
  • use an online, cost-tracking tool provided by the health plan (27 percent HSA vs. 21 percent HRA).

Moreover, the 2013 CEHCS also found that adults with an HSA were more likely than those with an HRA to be engaged in their choice of health plan, when they had a choice. They were, according to the analysis, more likely to report that they had talked to friends, family, and colleagues about the plans; used other websites to learn about health plan choices; and were more likely to have consulted with both their employer’s HR staff and an insurance broker to understand plan choices, among other things.

HRAs and HSAs are very similar, so why might those differences in behavior occur between those covered by the two plan types? Consider that an HRA is an employer-funded health plan that reimburses employees for qualified medical expenses, in contrast to the HSA, which can have both employer and employee contributions. HRAs are generally “notional” accounts maintained by the employer, and while funds unspent at the end of each year can be carried over for future use, that option is at the employer’s discretion.

On the other hand, and as the EBRI report notes, an HSA is owned by the individual and is completely portable, with no annual “use-it-or-lose-it” rule. Additionally, those who do not use all the money in their HSA during their working years can use it to pay out-of-pocket expenses after they retire.

Said another way, for most people the HSA balance probably feels like it is “their” money[iii], and they spend it accordingly, while their HRA feels more like a gift card with an expiration date. It’s certainly not “free” money, but it may feel that way to them.

  • Notes

[i] Overall, 26.1 million individuals with private insurance, representing 15 percent of the market, were either in an HRA or an HSA-eligible plan.  See “Who Has “Consumer-Driven” Health Plans?

[ii]Consumer Engagement Among HSA and HRA Enrollees: Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey,” is published in the June EBRI Notes here.

[iii] In many cases it is, of course, literally funded by their contributions.