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The Impact of PPA on Retirement Income for 401(k) Participants Jack VanDerhei and Craig Copeland, EBRI May 8, 2008 Simulation studies based on 401(k) participants in EBRI/ICI database Holden and VanDerhei (2002): “Can 401(k) Accumulations Generate Significant Income for Future Retirees?”

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the impact of ppa on retirement income for 401 k participants

The Impact of PPA on Retirement Income for 401(k) Participants

Jack VanDerhei and Craig Copeland, EBRI

May 8, 2008

simulation studies based on 401 k participants in ebri ici database
Simulation studies based on 401(k) participants in EBRI/ICI database
  • Holden and VanDerhei (2002): “Can 401(k) Accumulations Generate Significant Income for Future Retirees?”
    • Used EBRI/ICI database to project “401(k) projections” to retirement age
    • Median (nominal) replacement rates varied by income quartile from 51–69 percent under continuous coverage assumption
      • Decreased to 21–26 percent if coverage with a subsequent employer was purely random
    • Only modeled 401(k) participants with current balances
  • Holden and VanDerhei (2005): “The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement”
    • Examined current 401(k) participants and (synthetically) those who were assumed to be eligible nonparticipants
    • Increase in median replacement rates due to automatic enrollment with a 3 percent default contribution and life-cycle fund varied from 83 percent for lowest income quartile to 2 percent for highest income quartile
    • Written a year prior to PPA
      • Did not include any modeling on automatic escalation of employee contributions
  • VanDerhei (2007): The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income
    • PPA passed in 2006: Auto escalation provisions likely to be more prevalent
    • Extant literature has some examples of what would likely happen under auto escalation
      • However only a very short time horizon in each case
    • As part of the 2007 Retirement Confidence Survey (fielded several months after the enactment of PPA) this information was elicited from 456 employees who were currently contributing to a 401(k) plan
simulation studies based on all workers
Simulation studies based on all workers
  • Holmer (2007): “PENSIM Analysis of Impact of Final Regulations on Defined-Contribution Default Investments”
  • GAO (2007): “Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers”
    • Based on a sample of workers born in 1990
  • New model constructed for May 2008 EBRI Issue Brief
    • Basic structure from VanDerhei and Copeland (2003): “Can America Afford Tomorrow's Retirees: Results From the EBRI-ERF Retirement Security Projection Model”
      • With additional information from EBRI/ICI 401(k) database
    • Focus on account balance in current or previous employer’s 401(k) as well as any IRA rollovers originating in 401(k) accounts
    • Forward looking: only accumulations post-PPA (2008 or later)
    • Reported as multiples of final earnings available at age 65
model assumptions
Model assumptions
  • Employee behavior in voluntary enrollment plans
    • Asset allocation and contribution behavior as a function of employee age and income from EBRI/ICI data
  • Participation for voluntary and automatic enrollment plans; contribution and asset allocation for automatic enrollment plans
    • Fidelity (2007): Building Futures Volume VIII
    • Nessmith, Utkus, Young (2007): Measuring the Effectiveness of Automatic Enrollment
    • Choi, Laibson and Madrian (2004): Plan Design and 401(k) Savings Outcomes
automatic enrollment without automatic increase vs voluntary enrollment 50 th percentiles
Automatic enrollment without automatic increase vs voluntary enrollment: 50th percentiles
automatic enrollment without automatic increase vs voluntary enrollment 25 th percentiles
Automatic enrollment without automatic increase vs voluntary enrollment: 25th percentiles
automatic enrollment without automatic increase vs voluntary enrollment 75 th percentiles
Automatic enrollment without automatic increase vs voluntary enrollment: 75th percentiles
target final earnings multiples by gender and retirement age
Target Final Earnings Multiples, by Gender and Retirement Age

Source: Jack VanDerhei, "Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates" EBRI Issue Brief, September 2006

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