“Gamble” Gambit

By Nevin Adams, EBRI

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This past week PBS’ Frontline ran a segment on retirement titled “The Retirement Gamble.”

During that broadcast several individual cases were profiled—a single mother who lost her job (and a lot of money that she had apparently overinvested in company stock); a middle-aged couple whose husband had lost his job (and a big chunk of their 401(k) investment in the 2008 financial crisis); a couple of teachers who had seen their retirement plan investments do quite well (before the 2008 financial crisis); a 32-year-old teacher who had lost money in the markets and found herself in an annuity investment that she apparently didn’t understand, but was continuing to save; and a 67-year-old semi-retiree who had managed to set aside enough to sustain a middle-class lifestyle. The current income and/or working status of each was presented, along with their current retirement savings balance.

Much of the promotional materials around the program focused on fees, and doctoral candidate Robert Hiltonsmith featured prominently in the special. Hiltonsmith, as some may recall, was the author of a Demos report on 401(k) fees released about a year ago—one that claimed that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees (Demos report online here), according to its model—which, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund.

A fair amount of the program was devoted to the trade-offs between active and passive/index investment strategies, and the lower fees generally associated with the latter. Participant savers might not always choose them, but PLANSPONSOR’s 2012 Defined Contribution Survey found that nearly 8 in 10 (77.4 percent) of the nearly 7,000 plans surveyed already include index fund(s) on their menu, and that nearly 9 in 10 of the largest plans do. Similarly, the Plan Sponsor Council of America’s 55th Annual Survey lists “indexed domestic equity funds” as one of the fund types most commonly offered to participants (82.8 percent of plans).

“Balance” Perspectives

Hiltonsmith, 31, “had no savings to lose” in the 2008 financial crisis, according to the Frontline report, but after entering the workforce he began saving in his workplace 401(k). However, “even in a relatively good market, he began to sense that something was wrong,” the voiceover notes. Hiltonsmith explained: “I have a 401(k), I save in it, it doesn’t seem to go up… I kept checking the statement and I’d be like, why does this thing never go up?”

For some time now, EBRI has tracked the actual experience in 401(k) accounts of consistent participants, by age and tenure. Looking at the experience of workers age 25–34, with one to four years of tenure, and considering the period Jan. 1, 2011, to Jan. 1, 2013, the average account balance of consistent participants (those who continued to participate in their workplace 401(k) plan during that time period) experienced a nearly 84 percent increase (see graphic, online here).  Granted, at that stage in their career, most of that gain is likely attributable to new contributions, not market returns—but it is an increase in that savings balance, and one that Hiltonsmith,(1) as a consistent participant-saver should have seen as well.

Pension Penchant

The framing of the retirement “gamble” was that “it used to be much easier,” in 1972 when, the Frontline report states, “…42 percent of employees had a pension…” But one point the Frontline report ignores (as do many general media reports on this topic) is that there’s a huge difference between working at an employer that offers a pension plan (the apparent source of the Frontline statistic), and actually collecting a pension based on that employment. Consider that only a quarter of those age 65 or older actually had pension income in 1975, the year after ERISA was signed into law (see “The Good Old Days,” online here).  Perhaps more telling is that that pension income, vital as it surely has been for some, represented less than 15 percent of all the income received by those 65 and older in 1975.

In explaining the shift to 401(k) plans, the Frontline report notes that, “over the last decade, the rules of the game changed…” and went on to note that people started living longer, there were changes in accounting rules, global competition, and market volatility that affected the availability of defined benefit pension plans. While all those factors certainly did (and still do) come into play, another critical factor—one unmentioned in the report, and one that hasn’t undergone significant change in recent years—is that most Americans in the private sector weren’t working long enough with a single employer to accumulate the service levels required to earn a full pension.

For years,(2) EBRI has reported that median job tenure of the total workforce—how long a worker typically stays at a job—has hovered around four years since the early 1950s, and five years since the early 1980s. Under standard pension accrual formulas, those kind of tenure numbers mean that, even among the minority of private-sector workers who “have” a pension, many would likely receive a negligible amount because they didn’t stay on the job long enough to earn a meaningful benefit from that defined benefit pension.(3) Consequently, one could argue that American private-sector workers have been “gambling” with their pension every time they made a job change.

The Gamble?

It is, of course, difficult to evaluate the individual circumstances portrayed in the Frontline program from a distance, and via the limited prism afforded by the interviews. Nonetheless, even those in difficult financial straits were still drawing on their 401(k): the single mother had apparently managed to hang on to her underwater mortgage by tapping into her 401(k) savings, as had the couple who incurred a surrender charge by prematurely withdrawing funds from what appeared to be some kind of annuity investment. While this “leakage” was described as a problem, it does underline the critical role a 401(k) plan can play in the provision of emergency savings and financial security during every “life-stage.” Moreover, while the report focused on the circumstances of several individuals who had saved in a workplace retirement plan, one can’t help but wonder about the circumstances of those who don’t have that option.

The dictionary defines a gamble is a “bet on an uncertain outcome.” While the characterization might seem crude, retirement planning—with its attendant uncertainties regarding retirement date, longevity risk, inflation risk, investment risk, recession risk, health care expenses, and long-term care needs(4)—could be positioned in that context.

However, the data would also seem to support the conclusion that this retirement “gamble” isn’t new—and that it may be one for which, because of the employment-based retirement plan system, tomorrow’s retirees have some additional cards to play.

 Notes

You can watch the Frontline program (along with some additional materials, and expanded transcripts of some of the program interviews) online here.

(1) The Frontline investigation also seemed to represent something of a voyage of discovery for correspondent Martin Smith, who apparently has dipped into his 401(k) several times over the years. In a moment of subtle irony, he notes that he runs a small company with a handful of employees, but was too busy to look at the “fine print” of his own company’s retirement plan, going on to express confusion as to how these funds got into his plan in the first place. Of course, as the business owner, he was likely either the plan sponsor, or hired/designated the person(s) who made that decision.

(2) EBRI provided all of the data referenced here—and much more—to the Frontline producers. In fact, Dallas Salisbury was interviewed on tape for nearly two hours, so we know they had the full picture on tape. That may be what makes the Frontline program the most disappointing, knowing that the program could have presented a balanced picture of “The Retirement Gamble” and the diversity of plans, fees, and outcomes, yet its producers chose not to do so. EBRI’s most recent report on job tenure trends was published in the December 2012 EBRI Notes, online here.

(3) As EBRI has repeatedly noted, the idea of holding a full-career job and retiring with the proverbial “gold watch” is a myth for most people. That’s especially true since so few workers even qualify for a traditional pension anymore (see EBRI’s most recent data on pension trends, online here).

(4) EBRI’s Retirement Security Projection Model® (RSPM) finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see the May 2012 EBRI Notes,Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”).

Ripple Effects

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By Nevin Adams, EBRI

One of my favorite short stories is Ray Bradbury’s “A Sound of Thunder.” The story takes place in the future when, having figured out time travel, mankind has found a way to commercialize it by selling safaris back in time to hunt dinosaurs. Not just random dinosaurs, mind you—cognizant of the potential implications that a change in the past can ripple through and affect future events, the safari organizers take care to target only those that are destined to die in short order of natural causes. Further, participants are cautioned to stay on a special artificial path designed to preclude interaction with the local flora and fauna. Until, of course, one of the hunters panics and stumbles off the path—and the group finds that, upon returning to their own time, subtle (and not so subtle) changes have occurred. Apparently because in leaving the path, the hunter stepped on a butterfly—whose untimely demise, magnified by the passage of time produced changes much larger than one might have expected from its modest beginnings.

The recently released White House budget proposal for 2014 included a plan to raise $9 billion over 10 years by imposing a retirement savings cap for tax-preferred accounts. While initial reports focused on the aggregate dollar limit of $3 million included in the text, it soon became clear that that figure was merely a frame of reference for the real limit: the annual annuity equivalent of that sum, $205,000 per year in 2013 for an individual age 62.¹

Of course, there are a number of variables that influence annuity purchase prices. As an EBRI analysis this week outlines, while $3 million might provide that annual annuity today, if interest/discount rates were to move higher, that limit could be even lower. As the EBRI analysis explains, if you look only as far back as late 2006, based on a time series of annuity purchase prices for males age 65, the actuarial equivalent of the $205,000 threshold could be as low as $2.2 million—and a higher interest rate environment could result in an even lower cap threshold.

At the same time, the passage of time, which normally works to the advantage of younger savers by allowing savings to accumulate, tends to increase the probability that younger workers will reach the inflation-adjusted limits by the time they reach age 65, relative to older workers. The Employee Benefit Research Institute’s Retirement Security Projection Model® (RSPM) allows us to estimate what the potential future impact could be. Utilizing a specific set of assumptions,² EBRI finds that 1.2 percent of those ages 26–35 in the sample would be affected by the adjusted $3 million cap by the time they reach age 65, while 4.2 percent of that group would be affected by the cap of $2.2 million derived from the discount rates in 2006 cited above.

While the EBRI analysis offers a sense of how variables such as time, market returns, and discount rates can have, there are other potential “ripples” we aren’t yet able to consider, such as the potential response of individual savers—and of employers that make decisions about sponsoring these retirement savings programs—to such a change in tax policy.

Like the hunters in Bradbury’s tale, the initial focus is understandably on the here-and-now, how today’s decisions affect things today. However, decisions whose impact can be magnified by the passage of time are generally better informed when they also take into account the full impact³ they might have in the future.

Notes

¹ With the publication of the final budget proposal, we also learned that the calculation of the threshold also includes defined benefit accruals. While our current analysis did not contemplate the inclusion of defined benefit accruals, it seems likely that the number of individuals affected will change. The White House budget proposal is online here.

² The specific assumptions involved taking age adjustments into account in asset allocation, real returns of 6 percent on equity investments, and 3 percent on nonequity investments, 1 percent real wage growth, and no job turnover. This particular analysis was focused on participants in the EBRI/ICI 401(k) database with account balances at the end of 2011 and contributions in that year. The assumptions used in modeling a variety of scenarios is outlined online here.

³ As with all budget proposals, most of the instant analysis focuses on the numbers. The objective in this preliminary analysis was simply to answer the immediate question: How many individuals might be affected by imposing such a cap on retirement savings accounts? Of necessity, it does not yet consider the administrative complexities of implementation and monitoring such a cap, nor does it take into account the potential response of individual savers and their employers to such a change in tax policy—all of which could create additional “ripples” of impact. The latter consideration is of particular importance in considering the implications of tax policy changes to the current voluntary retirement savings system.

Confidence Builders

By Nevin Adams, EBRI

AdamsI’ll never forget my first day of driver’s ed class.  This was at a time when it was still part of the “regular” school curriculum, and we were placed in groups based on whether or not we had actually driven a car before.  Now, at the time, the extent of my driving was no more than backing the family car up and down our short driveway.  But driving looked easy enough, and my friends were in the “having driven” group, so I confidently “fudged” the extent of my experience and shortly found myself behind the wheel of the driver’s ed class car, along with my high school basketball coach/instructor and a couple of my friends in back.

To make a long story short, there was quite a bit of difference between backing a car up and down a driveway and navigating a car on the open road.  And, but for the extra brake on the instructor’s side of the vehicle, I might have spent my first driver’s ed class waiting to be pulled out of a ditch, my confidence notwithstanding.

The recent release of the 23rd annual Retirement Confidence Survey (RCS) got a LOT of attention.1  The headlines were mostly about Americans’ lack of confidence in their prospects for a financially secure retirement; indeed, the percentage “not at all confident” hit an all-time high for the RCS, while the percentage “very confident” remained at the all-time low it notched a year ago.  A striking number of inquiries about the report focused on what could be done about retirement confidence.

As it turns out, there are several things that the study linked to higher confidence: having more retirement savings is perhaps the most obvious connection, and so is participation in a workplace retirement savings plan (which was also linked to larger savings balances2).  However, the RCS also found that something as fundamental as having taken the time to do a retirement needs assessment made a positive difference in confidence3 – even though those who had done such an assessment tended to set higher savings goals.4  However, fewer than half of workers responding to the RCS have completed this assessment, and many of those who have made an attempt to figure out how much they might need – guess.5

Still, asked how much they need to save each year from now until they retire so they can live comfortably in retirement, one in five put that figure at between 20 percent and 29 percent, and nearly one-quarter (23 percent) cited a target of 30 percent or more.  Those targets are larger than one might expect, and larger than the savings reported by RCS respondents would indicate.  They do, however, suggest that some are beginning to grasp the realities of their situation – a realization that could be weighing on their confidence in the future, even as it lays the foundation for change.

Because, what really matters is not how confident you feel, but whether you have a reason to feel confident.

Notes

1 See The 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many

2 According to the 2013 RCS , workers who participate in a retirement savings plan at work (45 percent) are considerably more likely than those who are offered a plan but choose not to participate (22 percent) or are not offered a plan (18 percent) to have saved at least $50,000. These participants are much less likely than others to report having saved less than $10,000 (20 percent vs. 46 percent who choose not to participate and 50 percent who are not offered a plan).

3 A great place to start figuring out what you’ll need is the BallparkE$timate®, available online at www.choosetosave.org.  Organizations interested in building/reinforcing a workplace savings campaign can find a variety of free resources there, courtesy of the American Savings Education Council (ASEC).  Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

4 The RCS found that 31 percent who have done a calculation, compared with 14 percent who have not, say they are very confident that they will be able to accumulate the amount they need, while 12 percent who have not done a calculation, compared with 3 percent who have, report they are not at all confident in their ability to save the needed amount.

5 Workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic, retirement needs calculation, according to the RCS, while 18 percent indicated they did their own estimate, another 18 percent asked a financial advisor, 8 percent used an on-line calculator, and another 8 percent read or heard how much was needed.

Impact “Ed”

By Nevin Adams, EBRI

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Last month, the U.S. Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing titled “Pension Savings: Are Workers Saving Enough for Retirement?” The answer to that question is, of course, about as varied as the individual circumstances it contemplates, but certainly at a high level, the best answer is, “it depends.”

It depends on your definition of “enough,” for one thing—and it might well depend on your definition of retirement, certainly as to when retirement begins, not to mention your assumptions about saving and/or working during that period.(1) While those are individual choices (sometimes “choices” imposed on us), they can obviously make a big difference in terms of result.

For public policy purposes, EBRI has defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. Working from that definition as a starting point, along with an assumption that retirement represents the cessation of paid employment and begins at age 65, we have projected that approximately 44 percent of Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retain any net housing equity until other financial resources are depleted. That’s a lot of households, to be sure, but as an EBRI report noted last year, it includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.(2)

However, the focus of the recent Senate HELP hearing quickly turned from an acknowledgement that many workers aren’t saving enough to what to do about it. In a recent response to questions posed at the hearing,(3) EBRI Research Director Jack VanDerhei compiled a list of alternatives that EBRI research has modeled in recent years, some mentioned at the hearing, along with the impact each is projected to have on that cumulative savings shortfall.

Specifically, the impacts quantified on retirement readiness included in EBRI’s response were:

  • The availability of defined benefit (pension) plans.
  • Future eligibility for a defined contribution (401(k)-type) plan.
  • Increasing the 401(k) default deferral rate to 6 percent.
  • Job changes and default deferral rate restarts.
  • 401(k0 Loans and pre-retirement withdrawals.

The impacts of these factors vary, of course. Consider that, overall, the presence of a defined benefit accrual at age 65 reduces the “at-risk” percentage by about 12 percentage points. On the other hand, merely being eligible for participation in a DC plan makes a big difference as well: Gen Xers with no future years of DC plan eligibility would run short of money in retirement 60.7 percent of the time, whereas fewer than 1 in 5 (18.2 percent) of those with 20 or more years of future eligibility are simulated to run short of money in retirement.(4)

Ultimately, if you’re looking to solve a problem, it helps to know what problem you’re trying to solve. And you don’t just want to know that a solution will make a difference, you want to know how much of a difference that solution will make.

Notes

(1) Many other projections overlook, implicitly or explicitly, uninsured medical costs in retirement, and many simply publish a projected average result that will be correct only 50 percent of the time, without acknowledging these limitations. Moreover, while various estimates have been put forth for the aggregate retirement income deficit number, when taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized “as needed,” as well as uninsured health care costs, the EBRI Retirement Security Projection Model (RSPM) indicates the aggregate national retirement income deficit to be $4.3 trillion for all Baby Boomers and Gen.

(2) Nearly one-half (49.1 percent) of Gen Xers are projected to have at least 20 percent more than is simulated to be needed, for example, while about 1 in 5 (19.4 percent) are projected to have less than 80 percent of what is needed. See “All or Nothing? An Expanded Perspective on Retirement Readiness,” online here.

(3) The EBRI response to the Senate HELP hearing questions is available online here.

(4) See “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

The First Step

By Nevin Adams, EBRI

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For me, the hardest part of writing has always been that first sentence.

I don’t usually struggle with the topic, the angle to take, the length, the clever title, nor even the research and analysis that might be required to support the point(s) being made. All of those take time, energy, and effort, of course—but nothing like the effort I put into crafting those first few words. What makes that all the more ironic, particularly in view of the energy expended, is that the first sentence I wind up using often isn’t the one with which I began. It’s just the one that keeps me from getting started.

Aside from strained finances, “getting started” is perhaps one of the most commonly cited problems in saving. Most know the importance of saving, and appreciate the risk(s) of not having an emergency fund, or lacking adequate retirement savings. We have goals—both short- and long-term—that can be quantified, the ability to take advantage of payroll deductions, and/or regular account transfers from checking to savings, that can make savings easier. And yet, certainly outside of the structures of workplace-based retirement plans, many don’t save as they know they should.

According to the 2012 Retirement Confidence Survey (RCS),¹ workers who contribute to a retirement savings plan at work (45 percent) are considerably more likely than those who are not offered a plan (22 percent) to have saved at least $50,000, and were much less likely to report having saved less than $10,000 (24 percent vs. 63 percent who are not offered a plan).

There are a lot of “reasons” to put off savings. For some it’s the inconvenience of having to fill out a form, stop by the bank, or logging on to a website. Not knowing how much to save stymies some, while others are “stopped” by the size of a savings goal that may seem insurmountable. Still others are thwarted by what are, or appear to be, more pressing financial concerns.

In just a couple of weeks America Saves Week² will draw heightened attention to the benefits of saving—the importance of setting a goal, making a plan, and taking advantage of ways to save automatically—not just for one week, but for the rest of the year as well.

Like that first sentence, when it comes to saving, sometimes all you need is to get started. That starts with a decision to Choose to Save®³—and there’s no better time to start on that path to Save For Your Future® than today.

Notes

Organizations interested in building/reinforcing a workplace savings campaign can find free resources at www.asec.org including videos, savings tips, and the Ballpark E$stimate® retirement savings calculator, courtesy of the American Savings Education Council (ASEC).

¹ Information from the 2012 Retirement Confidence Survey (RCS) is available online here. Organizations interested in underwriting the RCS can contact Nevin Adams at nadams@ebri.org  

² America Saves Week is an annual event where hundreds of national and local organizations promote good savings behavior and individuals are encouraged to assess their own saving status. Coordinated by America Saves and the American Savings Education Council, America Saves Week is an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status. ASEC is a program of the Employee Benefit Research Institute (EBRI). Over 750 organizations have signed up to participate in the 7th annual America Saves Week, taking place February 25–March 2, 2013, in a nationwide effort to help people save more successfully and take financial action. More information is available at www.americasavesweek.org

³ Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI members and ASEC Partner institutions.

Tax Incentives for Retirement Plans: Lessons from Denmark?

Notes.Jan13.FinalFlow.TxIncns.Pg1A recent study found that tax incentives for retirement savings in Denmark had virtually no impact on increasing total savings But are those findings relevant to the United States?

Maybe not, according to a new report by EBRI: The two retirement systems have some similarities but also major differences—mainly that, unlike in the United States, in Denmark the availability of employment-based, tax-deferred retirement plans is not tied to the tax-deferred status of the accounts.

At issue are so-called “tax expenditures” in the United States—preferential tax treatment for public policy goals such as retirement, health insurance, home ownership, and a variety of other issues—that currently are under heavy scrutiny in the debate over the federal debt, taxes, and spending.

The authors of the study on Danish savings behaviors offered statistical evidence that changes in tax preferences for Danish work place retirement savings plans had virtually no effect on total savings of those affected by the change. This has drawn the attention of those interested in considering a modification of the long-standing tax preferences for employment-based retirement savings plans in this country.

However, aside from the differences in incentive structures between the two countries, the EBRI report notes that study of Danish workers examined only the impact that changes in tax incentives for work place retirement plans might have on worker savings behaviors—but did not address how employers might react to changes in retirement savings tax incentives.

The EBRI report notes recent surveys have found many American private-sector plan sponsors have expressed a desire to offer no plans at all in the absence of tax incentives for workers. If this happened, low-wage workers—who are generally less prepared for retirement—would suffer on several counts, said Sudipto Banerjee, EBRI research associate and co-author of the report.

“The Danish study provided insight into the savings behavior of Danes, conditioned by the culture and influences of public policies and programs of Denmark,” Banerjee said. “But the ‘success’ of work place retirement plans in the United States depends on the behavior of two parties: workers who voluntarily elect to defer compensation, and employers that sponsor and, in many cases, contribute to them.”

“While the study of Danish savings behaviors presented the impact of tax-incentives and the ‘nudges’ of automatic mandatory savings as an ‘either/or’ solution, the optimal solution—certainly for a voluntary system such as the one currently in place in the U.S.—may well be a combination of the two,” noted Nevin Adams, co-director of the EBRI Center for Research on Retirement Income, and co-author of the report.

The full report is published in the January 2013 EBRI Notes, “Tax Preferences and Mandates: Is the Danish Savings Experience Relevant to America?” online at www.ebri.org

Annuity Choice Driven by Pension Plan Rules

EBRI_IB_01-13.No381.Pg1_Page_01Why do some retiring workers with a pension choose to take a stream of lifetime income, while others cash out their entire benefit in a lump-sum distribution?

Amidst growing concerns about workers outliving their retirement savings, this has emerged as a key issue—and it depends to a large extent on whether the individual pension plan allows or restricts lump-sum distributions (LSDs), according to new research by EBRI. A better understanding of these decisions stands to shed light not only on the outcomes for traditional pensions, but also for defined contribution plans, where LSDs are the rule rather than the exception.

EBRI’s research, the first time this level of analysis has been done on this scale, reveals that differences in defined benefit (DB) plan rules or features result in very different annuitization rates. In fact, the results show that the rate of annuitization—the rate at which workers choose to take their benefit as an annuity—varies directly with the degree to which plan rules restrict the ability to choose a partial or lump-sum distribution. In choosing an LSD, the individual takes on the investment risk and responsibility for managing the distribution, and, ultimately, arranging his or her own income flow in retirement from those funds.

Analyzing data from more than 80 different pension plans, EBRI compares the “annuitization rate” among individuals at various age, tenure, and account balances, along with the rules and distribution choices within individual pension plans. EBRI found that between 2005 and 2010, pension plans with no LSD distribution options had annuitization rates very close to 100 percent. In contrast, the annuitization rate for defined benefit and cash balance plans with no restrictions on LSDs was only 27.3 percent.

“Whether people annuitize depends to a large extent on whether or not they are allowed to choose some other option,” said Sudipto Banerjee, EBRI research associate and author of the study. “Any study of annuitization that fails to take into account the impact of plan design on participant choice will likely lead to misinterpretations.”

The report notes that through the 1960s DB pension plans offered mainly one distribution choice: a fixed-payment annuity. That changed beginning in the 1970s, as some DB plans began to offer the option of full or partial single-sum distributions, and as “hybrid” pension plans expanded in the 1980s, so did distribution options. Today, most DB pension plans offer some type of single/lump-sum option, in addition to the traditional annuity choice.

The full report is published in the January 2013 EBRI Issue Brief no. 381, “Annuity and Lump-Sum Decisions in Defined Benefit Plans: The Role of Plan Rules,” online at www.ebri.org