Is There a Future for Retirement? in a World of Individual Decisions?

1. Is There a Future for Retirement? in a World of Individual Decisions? Dallas L. Salisbury President Employee Benefit Research Institute June 13, 2011

2. Plan Type Distinctions

3. Percentage of Private Sector Workers Participating in an Employment-Based Retirement Plan by Plan Type, 1979-2009* Source: DoL Form 5500 Summaries through 1998. *EBRI estimates 1999-2009

4. Defined Benefit Plans in Transition • 1/3 of private DB now hybrid with LSD option • ½ of private DB offer LSD at retirement and job change • Most private DB offer LSD on pre-retirement job change • Five states have now begun shift to plans that offer LSD • Pressure to move to DC from DB in public sector would likely include move to individual direction and LSD options • Introduces many individual decisions with the most important being whether or not to take any life income since the older you get the more longevity risk becomes your biggest risk (and running out of money before you run out of life)

5. Active Participants in 401(k) Plans, 1984-2008(millions) Source: DoL Pension Plan Bulletin, Historical Tables, 1975-2008. *In 2004, the DoL counted active participants differently causing a one year jump in the number of active participants.

6. Number of 401(k) Plans, 1984-2008 Source: DoL Pension Plan Bulletin, Historical Tables, 1975-2008.

7. Brief Chronology of the Development of the 401(k) plan in the US • Genesis -- 1978 • Section 401(k) added to IRC • Expansion to salary deferrals -- November 1981 • Proposed regulations • Constraints added in the 1980’s* • 402(g) limit • ADP/ACP nondiscrimination tests • Restrictions on hardship withdrawals • Flexibility added in the 1990’s • Safe-harbor plans (might want to mention SIMPLE plans too but I don’t think you will have enough time) • Automatic enrollment • The last ten years • Catch up contributions • Roth 401(k) • PPA and the mitigation of administrative concerns for automatic enrollment • Increase in percentage of 401(k) plans using automatic enrollment and auto escalation of contributions • QDIA regulations • The rise of TDFs • 2008/9 market crises • Enron and the appropriateness of company stock *mention that 415(c) was decreased but that applied to all DC plans

8. Employee contributions for men by age as a percentage of annual compensation for various combinations of initial match rate and maximum amount of compensation matched Source: VanDerhei, J. L. Copeland, C.A Behavioral Model for Predicting Employee Contributions to 401(k) Plans. North American Actuarial Journal(2001).

9. Predicted Contributions for Selected Persons and Plans Source: VanDerhei, J. L. Copeland, C.A Behavioral Model for Predicting Employee Contributions to 401(k) Plans. North American Actuarial Journal(2001).

10. 2005 RCS results (see first row)

11. Impact of suspending employer contributions:Percentage of 401(k) participants continuing to contribute in 2008 after a suspension in employer contributions by match rate proxy Note: tabulations from 401(k) plans with more than $100,000 in employer contributions in 2007 and none in 2008. Source: Jack VanDerhei, “Falling Stocks: What Will Happen to Retirees' Incomes? The Worker Perspective,” Presentation for The Economic Crisis of 2008: What Will Happen to Retirees’ Incomes? 2009 APPAM Fall Conference, November 2009.

12. Have you (or your spouse) tried to figure out how much money you will need to have saved by the time you retire so that you can live comfortably in retirement? (2011 Workers n=1004) The percentage of workers doing a retirement needs calculation. Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993-2011 Retirement Confidence Surveys.

13. Where Are Account Balances?

14. 401(k) Account Balancesa Among 401(k) Participants Present From Year-End 1999 Through May 1, 2011b Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. a Account balances are participant account balances held in 401(k) plans at the participants' current employers and are net of plan loans. Retirement savings held in plans at previous employers or rolled over into IRAs are not included. b The analysis for 1999 through 2009 is based on a group of 1.6 million participants with account balances at the end of each year from 1999 through 2009. The values for 2010 and May 1, 2011 are EBRI estimates

16. Figure 2: Change In Average Account Balances (by Age and Tenure) From January 1, 2010 – June 1, 2011 Among 401(k) Participants with Account Balances as of Dec. 31, 2009 Sources: 2009 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2011 Account Balances: EBRI estimates. The analysis is based on all participants with account balances at the end of 2009 and contribution information for that year.

17. Tenure

18. See EBRI April 2010 Issue Brief for more detail

20. EBRI Retirement Readiness Rating™ - where is the baseline today?

21. EBRI 2010 Retirement Readiness Ratings Sources: EBRI/ERF Retirement Security Projection Model ™ version 100504e; “The National Retirement Risk Index: After the Crash,” Center for Retirement Research at Boston College, October 2009; “Long-term Care Costs and the National Retirement Risk Index,” Center for Retirement Research at Boston College, March 2009

22. Impact of “salary” on at risk probability Source: EBRI/ERF Retirement Security Projection Model ™ version 100504e

23. Impact of age and future years of eligibility for participation in a defined contribution plan on at risk probabilities Source: EBRI/ERF Retirement Security Projection Model ™ version 100504e

24. Analyzing the importance of retirement age • Figures 20-22 of the EBRI July 2010 Issue Brief presents additional savings (expressed as a percent of compensation) needed to achieve various probabilities of success for retirement age at 65 • Unfortunately, the results for many combinations of age/income cohorts would be too high to be feasible • We have always known that the other possibility may be to defer retirement age • Assumes this is feasible • I.E., no health problems for worker or spouse, job still available • The Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned • 45 percent in 2011 • Easy to do stylized examples, but what would the impact be for baby boomers and gen Xers?

29. How Much do we need WHEN We consider Healthcosts?

30. Multiple of Final Earnings for a 90% Chance of Adequacy Males Retiring at Age 65 in the Lowest-Income Category: Final Earnings of $16,932 Building Block 2: Investment and longevity stochastic, health care expenses deterministic 16x & 17X Fin Ern Degree of Annuitization 20% Degree of Annuitization Longevity annuity Immediate annuity Source: Simuations from Ballpark E$timate Monte Carlo, Employee Benefit Research Institute Degree of Annuitization

31. Multiple of Final Earnings for a 90% Chance of Adequacy Males Retiring at Age 65 in the Lowest-Income Category: Final Earnings of $16,932 Building Block 3: Investment, longevity stochastic, and health care expenses stochastic 30x Fin Ern Degree of Annuitization 21% & 18% Longevity annuity Immediate annuity Source: Simuations from Ballpark E$timate Monte Carlo, Employee Benefit Research Institute Degree of Annuitization

32. The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income

37. Is There a Future for Retirement? in a World of Individual Decisions?

38. In most cases: The Individual Will Decide!

39. Discussion Dallas Salisbury www.ebri.org www.choosetosave.org