Pre-Existing Conditions?

Nevin AdamsBy Nevin Adams, EBRI

Much has been made of the so-called employer mandate of the Affordable Care Act, and its postponements. Of course, as a recent EBRI publication points out, the mandate (currently slated to be enforced effective in 2015) applies only to employers with 50 or more full-time workers – and most of these employers already offer health coverage to their workers. Last year, 91 percent of employers with 50–199 workers offered coverage, as did 99 percent of employers with 200 or more workers, according to the EBRI analysis.

However, the Patient Protection and Affordable Care Act (PPACA) defines a full-time employee as one who works 30 or more hours per week, on average – well below the 40-hour-week threshold typically associated with full-time employment. As a result, there is concern that employers may respond by cutting back on health coverage for part-time workers or by decreasing part-timer hours to keep them below the 30-hour-week threshold.

The EBRI report notes that, overall, there were 20 million workers employed under 30 hours per week and 18.8 million employed 30–39 hours per week in 2012. Among those employed between 30 and 39 hours per week, 6.3 million (33.6 percent) had employment-based coverage from their own job. In contrast, 60.5 percent of workers employed at least 40 hours per week had employment-based coverage from their own job.

Has the PPACA led to a reduction in hours? The EBRI analysis finds that between 2006 and 2010 (the year that PPACA was signed into law), the percentage of workers employed fewer than 30 hours per week increased from 11.9 percent to 14.1 percent, while the percentage of workers employed 30–39 hours per week also increased, from 11.4 percent to 13.2 percent over the period. Since passage of PPACA, there has actually been a slight drop in the use of part-time workers, though this may be attributable to the drop in the unemployment rate.

Indeed, the percentage of workers with coverage through their own job has been trending downward since 2007 regardless of hours worked per week. However, in relative terms, the EBRI report notes that part-time workers have experienced a much larger decline in coverage than full-time workers. Between 2007 and 2012, workers employed 40 or more hours per week experienced a 3 percent reduction in the likelihood of having coverage from their own job, while those employed 30–39 hours per week experienced a 12 percent decline (those employed fewer than 30 hours per week experienced a 20 percent decline).

Among workers employed 30–39 hours per week, both those who worked for a large employer and those who worked for a small employer experienced a 9 percent decline in coverage between 2008 and 2012.

The data confirm that the recent recession resulted in an increased use of part-time workers, but since 2010 the percentage of workers employed less than 40 hours per week has declined slightly. The data also indicate that while both full-time and part-time workers have experienced drops in health coverage, part-time workers have been affected disproportionately.

The question, of course, is whether PPACA’s full-time worker definition will accelerate – or ameliorate – those trends.

  • Notes

“Trends in Health Coverage for Part-Time Workers, 1999–2012” is published in the May EBRI Notes at http://www.ebri.org/pdf/notespdf/EBRI_Notes_05_May-14_PrtTime-Rollovers.pdf

 

The Hassle Factor

Nevin AdamsBy Nevin Adams, EBRI

Much is made these days of the application of behavioral finance and the implications for plan design, as well as the role of choice architecture in helping workers make “better” (if not more informed) benefit decisions.  Valuable as these insights have been, I think much of human behavior (or lack thereof) in these matters can be more simply explained.

What’s at work is a concept a friend of mine described to me more than 20 years ago – something he called “the hassle factor.”  It was a philosophy he routinely applied in many aspects of his personal and professional life.  Simply stated, presented with a choice between doing something that is hard, time-consuming, complicated, or even inconvenient, and doing something else, my friend – and, in fairness, human beings generally seem to be – inclined to opt for the latter.

Of course, the “hassle factor” CAN be trumped by exterior needs or forces, as anyone who has endured the long lines at the DMV or sat through the background music on an interminably long customer service line can attest.  That said, things like an unduly complicated 401(k) enrollment form/process can certainly serve as a barrier to plan entry, and there’s every reason to expect that the same might apply when it comes time to exit the plan.

Job change is a point in time at which a lot of important decisions are made—some voluntary and some forced upon us—and the disposition of one’s retirement savings account certainly looms large among them.  A recent EBRI Notes article examined what workers age 50 and above did with their defined contribution account balances at the point of job change, looking at data from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals age 50 and over.  EBRI analyzed responses from 2008 and 2010 for this study.

In terms of demographic characteristics, no significant difference was found between men and women in terms of their DC account balances and what they chose to do with them at job change.  And while married or partnered individuals were less likely to withdraw their assets and more likely to roll them over into an IRA than singles, the differences were small.

The EBRI analysis did find that a decision to take a withdrawal in cash declined with higher account balances, higher incomes, existing ownership of an IRA, and higher financial wealth. Not surprisingly, the decision to cash out rose with individual debt levels.

However, among those who left their employer but remained in the workforce, the most common outcome was to leave their retirement account balance with their prior employer’s plan.  The EBRI report notes that, unlike the outcomes detailed above, there was no clear trend between the financial variables, and the decision to leave those DC balances in the prior employer plans.

As for what might explain that outcome, the report noted that it might simply be a decision to postpone taking the money until it was needed, or that there “may be behavioral factors, such as inertia, driving what might be seen as a ‘non-decision.’”

Or, as my friend might have been inclined to say, a non-decision based on the “hassle factor.”

  • Notes

“Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” is published in the EBRI May Notes, available here.

Source “Spots”

Nevin AdamsBy Nevin Adams, EBRI

Individual retirement accounts (IRAs) have been around a long time – since the Employee Retirement Income Security Act of 1974 (ERISA), in fact[i].

Today IRAs represent nearly $6 trillion in assets, approximately a quarter of the $23.7 trillion in retirement plan assets in the nation. As an account type, they currently hold the largest single share of U.S. retirement plan assets with, as a recent EBRI publication notes, a substantial (and growing) portion of these IRA assets having originated in other tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans. Recognizing not only the significant growth but the increasing importance of these accounts to individual retirement security, the Department of Labor has proposed expanding ERISA’s fiduciary protections to these accounts.

To help better understand the trends driving this critical retirement savings component, the EBRI IRA Database, an ongoing project that collects data from IRA plan administrators across the nation, was created. For year-end 2012, it contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. The EBRI IRA Database is unique in its ability to track individual IRA owners with more than one account, thereby providing a more accurate measure of how much they have accumulated in IRAs.

For example, a recent EBRI analysis[ii] notes that the average IRA account balance in 2012 in the EBRI IRA database was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29 percent larger than the unique account balance.

While almost 2.4 million accounts in the EBRI IRA database received contributions in 2012, compared with the 1.3 million accounts that received rollovers for that year, the amount added to IRAs through rollovers was 10 times the amount from contributions.

However, an annual-snapshot percentage of IRA contributions doesn’t show whether the same individuals were contributing over time, or if different people contributed in different years. Taking advantage of the ability to look at multiple years across multiple accounts of individual owners across the EBRI IRA database, the report notes that while approximately 10 percent of traditional IRA owners contributed at some point during the three-year period, only 6 percent contributed to their IRA each year. On the other hand, while approximately 25 percent contributed to their Roth IRA in any one year, 35 percent did so at some point over the three-year period.

Looking at the pace of contribution activity, the EBRI analysis found that among those who contributed to their IRA in each of the three years, the pattern seemed pretty consistent: 12.1 percent did so in 2010, 13.2 percent in 2011, and 13.1 percent in 2012. Looking at the specific sources of those contributions, among traditional IRAs, we find that the percentage that contributed to them rose from 5.2 percent in 2010 to 6.6 percent in 2012 – but among Roth IRA owners, 24.0 percent contributed in 2010, 26.0 percent in 2011, and 25.1 percent in 2012.

Consider too that, among traditional IRA owners, only 3.0 percent contributed all three years, compared with 15.0 percent of Roth IRA owners who did so. Moreover, Roth IRA owners ages 25–29 were the most likely to contribute in any year and all three years (56.1 percent and 24.3 percent, respectively). Indeed, more than 4 in 10 (43 percent) Roth owners ages 25–29 contributed to their Roth in 2012.

The EBRI analysis found significant differences in the distribution patterns among older IRA owners, specifically those ages 70 or older, due to the required minimum distribution (RMD) rules. Those rules require individuals to begin making withdrawals from traditional IRAs starting April 1 of the year following the calendar year in which they reach age 70½. However, the RMD rules do not apply to Roth IRAs, a factor that likely explains the continued increases in account balances for Roth owners in that age group.

In sum, while the gross accumulations of retirement savings in IRAs provide value in terms of quantifying an increasingly significant component of the nation’s retirement security, a focus that takes into account only aggregate movements, or isolated account holdings, one that ignores the original source(s) of the money in the account, and/or the accompanying restrictions, runs the risk of overlooking significant undercurrents.

Undercurrents that may provide a better understanding of the growth trends in this important savings vehicle and ultimately, of course, explain how – and when – these retirement savings are withdrawn.

  • Notes

[i] Originally designed as a means to provide workers who did not have employment-based pensions an opportunity to save for retirement on a tax-deferred basis, IRAs have undergone a number of changes over time. The Economic Recovery Tax Act of 1981 (ERTA) extended the availability of IRAs to all workers with earned income (including those with pension coverage), while the Tax Reform Act of 1986 (TRA ’86) brought with it some restrictions on the tax deductibility (and, in some cases, availability) of IRA contributions. A decade later the Taxpayer Relief Act of 1997 (TRA ’97) created a new type of nondeductible IRA—the Roth IRA—and allowed nonworking spouses to contribute to an IRA, subject to certain income restrictions.

[ii] The May 2014 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is available online here.

 

 

Surface Conditions

Nevin AdamsBy Nevin Adams, EBRI

Our first home was in the Northwest suburbs of Chicago, a split-level (my wife’s preference), walking distance to the commuter train (my preference), and within our stipulated price range (“our” preference).  Much as we liked the house, we were not the first owners, and there were certain things we wanted to “fix.”  The first of these was the family room, where we figured to spend a lot of our time and which the previous residents had seen fit to line with pine paneling.  Our plan was to take down that paneling and replace it with wallpaper, to modernize and “open up” the room.

My previous experience with wallpapering was limited; in this case my job (as I understood it from my wife) was to take the lead in pulling down the paneling, and then to pretty much stand back and learn.  As I pulled back that first strip of paneling, I was nearly blinded by a flash of orange…which was from what turned out to be a misbegotten shade of 1970s floral print wallpaper which lay underneath the paneling.  “No problem,” my wife assured me; in fact, this might actually work to our benefit, she said, in that it implied that the previous owners would have treated the wall before putting up that paper.

Well, after 15 minutes of struggling to separate the paper from what lay beneath it, it was clear that they had NOT done so.  Moreover, one of the previous owners had apparently pasted the orange floral print over ANOTHER wallpaper, this one some hideous lime green.  Nor, as it turned out, was that the last of the layers (we stopped counting at six).  While we had made what we thought were reasonable conclusions about the size of the project based on the topline evidence, it was now clear that more—much more—was going on underneath (and apparently had been for some time).  Fortunately, we discovered that reality before I had ripped down so much paneling that we were committed to that course of action.

A growing concern for employers, workers, and policymakers alike is the changing composition of the American workforce and what that might mean for benefit plan designs, succession planning, and workforce management.

A recent EBRI Notes article examining the most recent U.S. Census Bureau data on labor-force participation notes that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s; and while both increased for a period of time in the latter half of the 1990s, as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased.  The report explains that, in 1997, workers ages 25–54 accounted for 83.9 percent of all workers ages 25 or older, while those ages 55–64 accounted for 12.0 percent, and those ages 65 or older, 4.1 percent.  However, by 2012, the fraction of older workers expanded; those ages 55–64 represented nearly 1 in 5 workers, while those 65 or older constituted 7.0 percent of the labor force.  Meanwhile, the percentage of workers 25 or older represented by those ages 25–54 slipped to 73.8 percent.

However, a closer examination of trends within the group ages 55 and older reveals some additional patterns of interest.  For those ages 55–64, the upward trend in the 1990s and into the 2000s was driven almost exclusively by the increased work force participation of women, while the male participation rate was flat to declining.  That is, until you look at the rate for those ages 65 or older, where the EBRI analysis shows that labor-force participation increased for both males and females over that period.

So, while it’s not clear whether older workers are filling a workforce gap or closing off opportunities for younger workers, older workers— notably older female workers— are certainly more plentiful in the labor force today, with potential workforce planning implications.

Ultimately, of course, it’s important to know what the numbers are and to examine the trends those numbers suggest over time.  However, and as the EBRI analysis reveals, sometimes you can’t fully understand the topline trends—and shouldn’t commit to a course of action—without first knowing what’s underneath.

  • Notes

The April EBRI Notes article “Labor-force Participation Rates of the Population Ages 55 and Older, 2013” is available online HERE.

Myth Understandings

Nevin AdamsBy Nevin Adams, EBRI

A frequent criticism of the 401(k) design is that it was “never designed” to provide a full retirement benefit, unlike, as it’s often stated or implied, the defined benefit plan.

Moreover, while there is a very real tendency to focus on the CURRENT balance[i] in a defined contribution/401(k) plan and treat that as the ultimate outcome, for reasons I’ve never really been able to understand, people tend to think and talk about defined benefit (DB) plans in terms of the benefit they are capable of providing, rather than the actual benefits paid.

However, the data show that some of the common assumptions about defined benefit pensions are out of line with the realities, including:

Once upon a time, everybody had a pension.

“Coverage” is a hot topic among policymakers these days, or more accurately, the lack of it. One of the most frequently invoked criticisms of the current system is that so many American workers don’t have access to a retirement plan at work. But in 1979, only 28 percent of private-sector workers participated in a DB plan, with another 10 percent participating in both a DB and defined contribution (DC) plan. By any measure, that’s a long way from “everybody.”

The reality is that more private-sector workers are participating in a workplace retirement plan today than in 1979.

People used to work for the same employer their whole careers.

My kids think their generation is the first to anticipate having many employers during their careers, but the reality is that American workers, certainly in the private sector, have long been relatively mobile in the workforce. Median job tenure of the total workforce has hovered at about five years since the early 1950s (in fact, as EBRI’s latest research points out, the average median job tenure has now risen, to 5.4 years).[ii] The data on employee tenure—the amount of time an individual has been with his or her current employer—show that career jobs never existed for most workers and have continued not to exist for most workers.

And that has implications for pension benefits.

Everybody who had a pension got a full benefit.

Those who know how defined benefit plan accrual formulas work understand that the actual benefit is a function of some definition of average pay and years of service. Moreover, prior to the mid-1980s, 10-year cliff vesting schedules were common for DB plans. What that meant was that if you worked for an employer fewer than 10 years, you’d be entitled to a pension of … $0.00.

As noted above, the American workforce has, since the end of World War II, been relatively, and consistently, mobile. Between 1987 and 2012, among private-sector workers, fewer than 1 in 5 have spent 25 years or more with one employer. Under pension accrual formulas, those kinds of numbers meant that, even among the workers who were covered by a traditional pension, many would actually receive little or nothing from that plan design.

And that’s for those who were covered in the first place[iii].

People used to get more retirement income from pensions than they do today.

There are undoubtedly different challenges ahead for retirees than for prior generations – longer lives, higher health care costs, the pressures of affording long-term care – but when it comes to sources of retirement income for those over the age of 65, there has been remarkably little change over the past several decades.

Social Security is and has been a consistent source, representing somewhere between 40 and 45 percent of aggregate income (excluding non-periodic distributions from DC plans and IRAs) during most of that time, and into the current time, according to data from the Census Bureau. Pension annuity income, which constituted about 16 percent of aggregate income in 1976, rose to as high as 21 percent in the early ’90s – about where it stands today.

There’s no question that some Americans in the private sector have derived, and will continue to derive, significant retirement income from DB plans, and DB plans did and can deliver for the portion of the population that does stay with one employer/plan for a full career[iv].

The data show, however, that many Americans were not covered by those plans, even in the “good old days,” and that even many of those who were covered, for a time anyway, were not likely to receive the full benefit that the design was capable of delivering because they didn’t have, or take advantage of, the opportunity.

Sound familiar?

Notes

[i] Worse, that 401(k) balance is frequently an AVERAGE 401(k) balance, which includes the relatively small balances of those who have just started saving with those who have had a full career to save. That’s why reports from the EBRI/ICI 401(k) database have long differentiated average and median balances by age and tenure. See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012.”

[ii] See “Employee Tenure Trends, 1983–2012.”

[iii] Expectations for pension benefits appear to exceed the reality, even among workers. The 2014 Retirement Confidence Survey found that while 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 31 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. See here

 [iv] For an analysis of possible outcomes from DB and 401(k) plans, see “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.”

 

Work “Forces”

Nevin AdamsBy Nevin Adams, EBRI

A couple of years ago, my wife and I sat down with an advisor to revisit our financial plan.  Having gathered all the requisite information regarding assets, debt, insurance, and retirement savings, he turned to me and asked how long I planned to work.

Being in a profession that I not only enjoy, but one relatively unbounded by physical constraints; having some appreciation for the various financial trade-offs associated with the decision to retire, yet desirous of the ability to have more leisure time with my family—conscious of the fact that I have made a career studying and writing about such decisions—I paused to reflect….

And then my wife, with a smile on her face, laughed and said, “Oh, he’s going to work forever!”

Well, that wasn’t the answer I had in mind, but apparently I’m not the only one rethinking retirement.  In 1991, just 11 percent of workers expected to retire after age 65, according to the Retirement Confidence Survey (RCS)[i]. Twenty-three years later, in 2014, 33 percent of workers report that they expect to retire after age 65, and 10 percent don’t plan to retire at all. At the same time, the percentage of workers expecting to retire before age 65 has decreased, from 50 percent in 1991 to 27 percent.  Those expectations notwithstanding, the median (midpoint) age at which workers expect to retire has remained stable at 65 for most of the 24-year history of the RCS.

Moreover, a recent EBRI Notes article[ii] confirms that the labor-force participation rate for those ages 55 and older rose throughout the 1990s and into the 2000s when it began to level off, but with a small increase following the 2007-2008 economic downturn.  While for those ages 55-64 the upward trend was driven almost exclusively by the increased labor-force participation of women, among those age 65 or older, the rate increased for both males and females over that period.

The report notes, however, that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s, but as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased – suggesting either that older workers filled the void left by younger workers’ lower participation, or that the higher representation in the workforce by older workers served to limit the opportunities for younger workers, either directly or perhaps by discouraging them from pursuing employment.

As the EBRI report notes, this upward trend in labor-force participation by older workers is perhaps related to workers’ desire for continued access to employment-based health insurance, to provide some additional years of employment to accumulate savings and/or pay down debt, or maybe even simply because they want to work.

Whatever their motivation(s), these trends highlight a number of key concerns for employers and policy makers: Will workers who want—or need—to increase their financial resources by working longer be able to find jobs?  How might workforce management (and health care costs) be affected by those decisions?  What could delayed workforce entry mean to the retirement savings accumulations of younger workers?

Ultimately, of course, and as the trends tracked and analyzed by EBRI have long indicated, the road through retirement is often influenced by the paths we take to retirement—and when, how, and if we are able to make the transition.

  • Notes

[i] See “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans.”

[ii] The April EBRI Notes article, “Labor-force Participation Rates of the Population Ages 55 and Older, 2013,” is available online here.

 

“Crisis” Management

Nevin AdamsBy Nevin Adams, EBRI

“Houston, we have a problem.”

That’s perhaps the most famous quote from one of my favorite movies—the 1995 “Apollo 13,” the story of the ill-fated moon landing mission of the same name. As the third such undertaking, it was a mission that the nation largely ignored—until that mission ran into trouble. Trouble in this case meant having an oxygen tank explode two days into their trip to the moon, which led to a reduction in power, loss of heat in the cabin, a shortage of drinkable water, and ultimately the need to jury-rig the system that removed carbon dioxide from the cabin. Arguably, Apollo 13 didn’t have a “problem”; they had a crisis, and one that threatened their very lives.

While we’re a few years removed from the financial crisis that led to the so-called Great Recession, “crisis” is a word much bandied about these days. Crisis is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has its fair share. Thus, whether it’s the looming retirement crisis some see (or see for some) on the horizon, the crippling impact of college debt on the finances (and future financial security) of younger Americans, or the health care crisis that the ACA was designed to forestall (or that some say is destined to create), we are all challenged and confronted—by those at nearly every point along the political spectrum—with the urgency of the need to address the “crisis.”

But do these circumstances constitute a “crisis”? A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.”

On May 15, the Employee Benefit Research Institute will host its 74th Policy Forum, titled “‘Crisis’ Management: Uncertainty and the Workplace.” We’ll examine the current and projected future state of retirement readiness, employment-based health care, and the role that approaches such as financial wellness can play in alleviating the strains of uncertainty.

It promises to be an interesting and insightful discussion—one that you can expect to learn from and profit by participating, whether you’re looking for ideas to help stave off a systemic crisis, to better understand the current and future environment of employment-based benefits and the policies that could have an influence, or for ways to improve the current system(s).

It may or may not be a crisis—but these are topics whose resolution could well affect all our lives.

Reserve your place today at http://www.ebri.org/register/.
– Notes 

[1] Iconic as it might be, the movie’s most famous quote, “Houston, we have a problem”, wasn’t an accurate quote. According to NASA audio files, Astronaut Jack Swigert first said, “OK Houston, we’ve had a problem here.” Mission Control said, “This is Houston. Say again, please.” Then Jim Lovell said, “Ahh, Houston, we’ve had a problem.”

Because “we’ve had” implies the problem has passed, movie director Ron Howard chose to use “we have”.