GAO Report on Retirement Savings: Overall Gaps Identified, but the Focus of Retirement Security Reform Should be on the Uncovered Population

VanDerhei

VanDerhei

By Jack VanDerhei, EBRI

The Government Accountability Office’s new retirement analysis reviewed nine studies conducted between 2006 and 2015 by a variety of organizations and concluded that generally one-third to two-thirds of workers are at risk of falling short of their retirement savings targets.

However, many of these studies use a “replacement rate” standard: Most commonly, this analysis concludes that you need to replace 70–80 percent of your preretirement income to be assured of a successful retirement. This is a convenient metric to use to convey retirement targets to individuals—and no doubt provides useful information to many workers who are attempting to determine whether they are “on-track” with respect to their retirement savings and/or what their future savings rates should be. However, replacement rates are NOT appropriate in large-scale policy models for determining whether an individual will run short of money in retirement. Why?

Because simply setting a target replacement rate at retirement age and suggesting that anyone above that threshold will have a “successful” retirement completely ignores:

  1. Longevity risk.
  2. Post-retirement investment risk.
  3. Long-term care risk.

In fact, looking at just the first two risks above, if you use a replacement rate threshold based on average longevity and average rate of return, you will, in essence, have a savings target that will prove to be insufficient about 50 percent of the time. Of course, this would not be a problem if retirees annuitized all or a large percentage of their defined contribution and IRA balances at retirement age; but the data suggest that only a small percentage of retirees do this.

In contrast, EBRI has been working for the last 14 years to develop a far more inclusive, sophisticated, realistic—and, yes, complex—model that deals with all these risks. It’s our Retirement Security Projection Model® (RSPM), and produces a Retirement Readiness Rating (basically, the probability that a household will NOT run short of money in retirement).

Blog.JV.GAO-rpt.June15.Fig1Our most recent Retirement Readiness Ratings by age are shown in Figure 1 (left). Our baseline results do include long term care costs (the red bars), but we also run the numbers assuming that these costs are NEVER paid by the retirees (the green bars). This latter assumption is not likely to be realistic for many retirees, but we include it to show how important it is to include these costs (unlike many other models).

Even more important is Fig. 2 (right), which shows Retirement Readiness Ratings as a function of preretirement income AND the number of future years of eligibility for a defined contribution plan for Gen Xers.

Blog.JV.GAO-rpt.June15.Fig2Even controlling for the impact of income on the probability of a successful retirement, the number of future years that a Gen Xer works for an employer that sponsors a defined contribution plan will make a tremendous difference in their Retirement Readiness Ratings (even with long-term care costs included).

The evidence from EBRI’s simulation modeling certainly agrees with the GAO that a significant percentage of households will likely run short of money in retirement if coverage is not increased. However this is because we model all the major risks in retirement and do not simply assume some ad-hoc replacement rate threshold.

Moreover, using an aggregate number to portray the percentage of workers at risk for inadequate retirement income is really missing the bigger picture. The retirement security landscape for today’s workers can be bifurcated into those fortunate enough to work for employers that sponsor retirement plans for a majority of their careers vs. those who do not. In general, those who have an employer-sponsored retirement plan for most of their working careers appear to be well on their way to a secure retirement.

Perhaps the focus of any retirement security reform going forward needs to be on those who do not work for employers offering retirement plans and those in the lowest-income quartile.

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Jack VanDerhei is research director at the Employee Benefit Research Institute.

Take it or Leave it?

By Nevin Adams, EBRI
Nevin Adams

Nevin Adams

While each situation is different, in my experience leaving a job brings with it nearly as much paperwork as joining a new employer. Granted, you’re not asked to wade through a kit of enrollment materials, and the number of options are generally fewer, but you do have to make certain benefits-related decisions, including the determination of what to do with your retirement plan distribution(s).

Unfortunately, even in the most amicable of partings, workers have traditionally lacked the particulars to facilitate a rollover to either an individual retirement account (IRA) or a subsequent employer’s retirement plan—and thus, the easiest thing to do was simply to request that distribution be paid to him or her in cash.

Over the years, a number of changes have been made to discourage the “leakage” of retirement savings at job change: Legal thresholds for mandatory distributions have been set; a requirement established that distributions between $1,000 and $5,000 on which instructions are not received either be rolled over into an IRA or left in the plan; and even the requirement that a 20 percent tax withholding would be applied to an eligible rollover distribution—unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. All these have doubtless served to at least give pause to that individual distribution “calculus” at job change.

Indeed, a recent EBRI analysis¹ indicates that workers now taking a retirement plan distribution are doing a better job at holding on to those retirement savings than had those in the past. Among those who reported in 2012 ever having received a distribution, 48.1 percent reported rolling over at least some of their most recent distribution into another tax-qualified savings vehicle, and among those who received their most recent distribution through 2012, the percentage who used any portion of it for consumption was also lower, at 15.7 percent (compared with 25.2 percent of those whose most recent distribution was received through 2003, and 38.3 percent through 1993).

As you might expect with the struggling economy, there was an uptick in the percentage of recipients through 2012 who used their lump sum for debts, business, and home expenses, and a decrease in the percentage saving in nontax-qualified vehicles relative to distributions through 2006. However, the EBRI analysis found that the percentage of lump-sum recipients who used the entire amount of their most recent distribution for tax-qualified savings has increased sharply since 1993: Well over 4 in 10 (45.2 percent) of those who received their most recent distribution through 2012 did so, compared with 19.3 percent of those who received their most recent distribution through 1993.

The EBRI report also notes that an important factor in the change in the relative percentages between the 1993 and 2012 data is the percentage of lump sums that were used for a single purpose. Consider that among those who received their most recent distribution through 2012, nearly all (94.0 percent) of those who rolled over at least some² of their most recent distribution did so for the entire amount.

There is both encouraging and disappointing news in the EBRI report findings: The data show that improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their LSDs on job change, along with less frequent pure-consumption use of any of the distributions. However, the data also show that approximately 55 percent of those who took a lump-sum payment did not roll all of it into tax-qualified savings.

In common parlance, “Take it or leave it” is an ultimatum—an “either/or” proposition that frequently comes at the end, not the beginning, of a decision process. However, as the EBRI analysis indicates, for retirement plan participants it is a decision that can (certainly for younger workers, or those with significant balances) have a dramatic impact on their financial futures.

Notes
¹ The November 2013 EBRI Notes article, “Lump-Sum Distributions at Job Change, Distributions Through 2012,” is online here. 
² Two important factors in whether a lump-sum distribution is used exclusively for tax-qualified savings appear to be the age of the recipient and the size of the distribution. The likelihood of the distribution being rolled over entirely to tax-qualified savings increased with the age of the recipient at the time of receipt until age 64. Similarly, the larger the distribution, the more likely it was kept entirely in tax-qualified savings.

Ripple Effects

Adams

Adams

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.

The First Step

By Nevin Adams, EBRI

Adams

Adams

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.

Higher Starting Point Would Significantly Increase Retirement Security “Success”

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

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

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

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

Jack VanDerhei

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

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

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

“Storm” Warnings

By Nevin Adams, EBRI

Adams

Amidst the recent coverage of Hurricane Isaac, I was reminded that it was only a year ago that Hurricane Irene came barreling up the East Coast. We had just deposited my youngest off for his first semester of college, and then spent the drive home up the East Coast with Irene (and the reports of her potential destruction and probable landfalls) close behind. We arrived home, unloaded in record time, and went straight to the local hardware store to stock up for the coming storm.

We weren’t the only ones to do so, of course. And what we had most hoped to acquire (a generator) was not to be found—there, or at that moment, apparently anywhere in the state.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall was relatively unique, we had, on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator—but, as human beings are inclined to do, thinking that I had time to do so when it was more convenient, I simply (and repeatedly) postponed taking action.

Life is full of uncertainty, and events and circumstances, as often as not, happen with little, if any warning. However, hurricanes you can see coming a long way off. There’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with Hurricane Katrina, the real impact is what happens afterward. In theory, at least, that provides time to prepare—but, as I was reminded a year ago, sometimes you don’t have time enough.

I suppose a lot of retirement plan participants are going to look back at their working lives that way as they near the threshold of retirement. They’ll likely remember the admonitions about saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios. The Retirement Confidence Survey (RCS) has, for years now, chronicled not only the current state of retirement unpreparedness of many, but their awareness of the need to be more attentive to those preparations. Sure, you can find yourself forced suddenly into an unplanned retirement—in fact, retiree respondents to the RCS have long indicated that they stopped working sooner than they had planned.¹ But most of us have plenty of time, both to see that day coming, and to do something about it.

Ultimately, of course, what matters isn’t the time you have, it’s what you do² with it.

Notes

¹ Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that more than tripled, to 37 percent. Those expectations notwithstanding, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure (see “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” online here).

² A great place to start those preparations is to figure out what you’ll need, as millions of Americans have with the BallparkE$timate,® developed by the research team at the Employee Benefit Research Institute, and available online here.

Additionally, a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants, is available here.

Different Mindsets

By Nevin Adams, EBRI

Adams

Last week Beloit College released the Beloit College Mindset List, as it has each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.”

For example, this year’s freshman class, born in 1994, have never known a time when history didn’t have its own channel, when there were tan M&Ms (or when there weren’t blue ones), or when “It’s A Wonderful Life” was shown more than twice during the holidays. They grew up talking about “who shot Mr. Burns?” not “Who Shot J.R.?” and while for them there’s always been an NFL franchise in Jacksonville, they’ve never known one in Los Angeles. That floppy disk icon for “save” in the word processing document is as anachronistic to them as the “CC” reference to “carbon copy” likely was to their parents’ email. And, perhaps most significantly, they have never lived in a world without the World Wide Web.¹

Despite those differences, the class of 2016 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and—eventually—how and how fast to draw down those savings.

Those fortunate enough to have access to a work place retirement savings plan at least stand to have some advantages their parents didn’t. They’ll have a better shot at joining those programs immediately, rather than waiting a year, as was once the norm. There’s a growing chance that they will be enrolled in those plans automatically,¹and with the option to increase that initial contribution automatically as well. The expanding availability of qualified default investment alternatives, like target-date funds, should make their investment choices easier and better diversified, and some will likely benefit from the counsel of a growing number of expert advisors. As for help in figuring out how best to draw down those savings in retirement, more choices and alternatives come to market every year.

However, they also have another big advantage (and one that helps make all those other advantages all the better): They’ll have the advantage of time, a full career to save and build, to save at better rates, to invest more efficiently and effectively.

It’s more than just a shift in mindset—and it could give retirement saving a whole new perspective.

Notes

¹ The full 2016 Mindset List (and links to prior years’ lists) is online here.

² EBRI has recently quantified the impact of eligibility for participation in a 401(k) plan on retirement readiness for Gen Xers. See this report online here.  See also “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

Withdrawal “Symptoms”

By Nevin Adams, EBRI

Adams

I was recently asked about the so-called 4 percent “rule.” That’s the rule of thumb(1) that many financial consultants rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. Of course, like so many of the “assumptions” about retirement, certainly in the aftermath of the 2008 financial crisis, that withdrawal rule of thumb has drawn additional scrutiny.(2)

At the time, my comment was that the 4 percent guideline is just that—a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on.

How much are people actually withdrawing from their retirement accounts? At a recent EBRI policy forum,(3) Craig Copeland, senior research associate at the Employee Benefit Research Institute, explained that the median IRA individual withdrawal rates amounted to 5.5 percent of the account balance in 2010, though he noted that those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3–5 percent (in 2008, that group’s median withdrawal rate was 7.2 percent, but in 2010, it was 5.2 percent), based on the activity among the 14.85 million accounts and $1 trillion in assets contained in the EBRI IRA Database.(4) Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement?

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4 percent “rule” is really just a mathematical exercise.

However, trying to live on the resources you actually have available in retirement is reality—and those post-retirement withdrawal decisions are generally easier to make when you’ve made good decisions pre-retirement.

Notes

(1) Certified financial planner William P. Bengen is frequently credited with the concept, based on his article “Determining Withdrawal Rates Using Historical Data,” published in the October 1994 issue of the Journal of Financial Planning.

(2) It had drawn criticism before the 2008 financial crisis as well: See “The 4% Rule—At What Price?”

(3) The agenda, presentation materials, and a recording of EBRI’s May policy forum are available online here. Dr. Copeland’s presentation is online here.

(4) The results come from 2010 data in the EBRI IRA Database,TM which had 14.85 million accounts, held by 11.1 million individuals, with $1 trillion in assets—roughly one-fifth of both owners and assets in the IRA universe.

Facts and “Figures”

By Nevin Adams, EBRI

A recent paper from the Center for Retirement Research at Boston College was titled “401(k) Plans in 2010: An Update from the SCF.”  The SCF1 (perhaps better known to non-researchers as the Survey of Consumer Finances) is, as its name suggests, a survey of consumer households “to provide detailed information on the finances of U.S. families.”  It’s conducted every three years by the Federal Reserve, and is eagerly awaited and widely used—from analysis at the Federal Reserve and other branches of government to scholarly work at the major economic research centers.  The 2010 version was published in June.

As valuable as the SCF information is, it’s important to remember that it contains self-reported information from approximately 6,500 households in 2010, which is to say the results are what individuals told the surveying organizations on a range of household finance issues (typically over a 90 minute period); of those households, only about 2,100 had defined contribution retirement accounts.  Also, the SCF does not necessarily include the same households from one survey period to the next.

The CRR analysis incorporated some of the SCF data (ownership of a retirement plan account, participation, median 401(k)/IRA account balances, asset allocations within those accounts, and distribution/loan patterns).  The report then brings in data from other sources on features such as automatic enrollment, hardship withdrawals, and IRAs to complete its assessment, summarized on its website as “Progress in the 401(k) system stalled in the wake of the economic crisis.”

The summary went on to note that “despite an increase in auto-enrollment, the percent of employees not participating ticked up,” “401(k) contributions slipped, while leakages through cash outs, loans, and hardship withdrawals increased”—and that, “…the typical household approaching retirement had only $120,000 in 401(k)/IRA holdings in 2010, about the same as in 2007.”  Setting aside for a moment the question of what “typical” is, a logical research question arises:  Are these statements a researcher’s extrapolation, or based upon hard data, and thus “facts”?

What We Know

EBRI research has previously noted that, while the financial crisis of 2008 had a significant impact on retirement savings balances, as recently as just a month ago, more than 94 percent of the consistent participants in the EBRI/ICI 401(k) database2 are estimated to have balances higher than they did at the pre-recession market peak of October 9, 2007 (see “Returns Engagement”).   According to a number of industry surveys, participation rates have remained relatively consistent, despite the soft economy and tumultuous market environment, and EBRI research finds comparable trends in loan activity (see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010”).   Also, at year-end 2010, the data show that 401(k) loan balances outstanding declined slightly from those in the past few years.

What else do we know?

We know that the number of future years that workers are eligible to participate in a defined contribution plan makes a tremendous difference in their at-risk ratings (See “Opportunity Costs”).

We know that automatic enrollment, where deployed, has a significant positive impact on retirement readiness (see “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors”; “EBRI:  Auto-Enrollment Trend Boosts Retirement Readiness Ratings”).

We know that “averages” are easy to understand, and relatively easy to calculate—but they don’t always provide an accurate3 portrayal of the real world (see “Above Average”).

We also know that it’s important to understand the source and composition of data—particularly when using self-reported results, drawing from multiple sources, and creating a composite perspective.

Notes

(1)    The 2010 Survey of Consumer Finances is available here.

(2)    As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.  The 2010 EBRI/ICI database covered 46 percent of the universe of 401(k) plan participants, and 47 percent of 401(k) plan assets. 

(3)    When analyzing the change in participant account balances over time, it is important to have a consistent sample. Comparing average account balances across different year-end snapshots can lead to false conclusions. For example, the addition of a large number of new plans (arguably a good event) to the database would tend to pull down the average account balance, which could then be mistakenly described as an indication that balances are declining, but actually would tell us nothing about consistently participating workers.

Returns “Engagement”

By Nevin Adams, EBRI

Adams

An acquaintance of mine once remarked, “you can’t solve a savings problem with investment returns.” Yet, participants frequently focus on the returns of their retirement savings investments.

Consider that during the month of May, major stock indexes like the Dow Jones Industrial Average and the S&P 500 were off 6 percent. But, according to an EBRI analysis, the estimated average 401(k) account balance¹ was down less than 3 percent during that same month, both due to the inflow of ongoing contributions and more diversified portfolio holdings.

That determination is based on estimates from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project—the largest, most representative repository of information about individual 401(k) plan participant accounts. In fact, as of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

Using that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has produced estimates of the cumulative changes in account balances—both as a result of contributions and investment returns— for several combinations of participant age and tenure.

While the estimated monthly movements² are interesting, they aren’t nearly as important as the perspective the database offers on long-term trends. For example, while the financial crisis of 2008 had a significant impact on retirement savings balances, as of June 5, 2012, more than 94 percent of the consistent participants in the database are estimated to have balances higher than they did at the pre-recession market peak (October 9, 2007).

During election cycles, voters are frequently asked “are you better off now than you were four years ago?” The answer, at least when it comes to consistent participants and their retirement savings accumulations, would seem to be “yes.”

Notes

¹ For “consistent” participants, that is, participants assumed to be in the 401(k) plan at the beginning and end of the specific reporting period.

² EBRI updates the change in 401(k) balances each month at http://www.ebri.org/index.cfm?fa=401kbalances . Here you will find both a listing of “Cumulative Change,” a projected cumulative percentage change in account balances for consistent participants since the last annual update of the database. Additionally, the monthly rate of change in average account balances is presented for those same individuals. For assistance on interpreting these results, please contact Jack VanDerhei at vanderhei@ebri.org