Institute of medicine and national research council

® Employee Benefit Research Institute 2013® Employee Benefit Research Institute 20131

The Role of the Private Sector in Improving Retirement Income Adequacy

Institute of Medicine and National Research CouncilFORUM ON AGING, DISABILITY, AND INDEPENDENCE

Jack VanDerheiResearch Director, Employee Benefit Research Institute

June 12, 2013

[email protected]


Key points

• Extent of the problem (EBRI RSPM)• 60 percent of lowest income quartile will run short of money in retirement

• 41 percent within ten years of retirement• Future years of eligibility in a defined contribution plan makes a huge difference• Retirement Saving Shortfalls: vast majority of it disappears if “stochastic health

expenses” are eliminated

• What can employers do?• Automatic enrollment 401(k) plans are a major improvement over voluntary

enrollment 401(k) plans• Especially for low income

• Automatic escalation of contributions may make AE 401(k) even better• Depends on plan design and employee behavior

• What can (could?) employees do?• Purchase of LTCI

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EBRI’s Retirement Security Projection Model®

• Accumulation phase• Simulates retirement income/wealth for Boomers and Gen Xers from defined

contribution, defined benefit, IRA, Social Security and net housing equity• Pension plan parameters coded from a time series of several hundred plans.• 401(k) asset allocation and contribution behavior based on individual

administrative recordso Annual linked administrative records dating back to 1996 o More than 24 million employees in 60,000 plans.

• Retirement phase• Simulates 1,000 alternative life-paths for each household starting at 65• Deterministic modeling of food, apparel and services, transportation,

entertainment, reading and education, housing, and basic health expenditures.• Stochastic modeling of longevity risk, investment risk, nursing facility care and

home based health care.

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® Employee Benefit Research Institute 2013

0 5 10 15 20 25 30 35 40 450%

10%

20%

30%

40%

50%

60%

70%

Years in Retirement Before Early Boomers Run Short of Money,* by Preretirement Income Quartile

Lowest

2

3

Highest

Years in Retirement (Assuming retirement at age 65)

Cum

ulat

ive

Pro

babi

lity

Income Quartile

Source: VanDerhei and Copeland (2010)


Source: VanDerhei (May 2012)


Married Single Female

Single Male Married Single Female

Single Male Married Single Female

Single Male

Early Boomers Late Boomers Gen Xers

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Average Individual Retirement Income Deficit by Gender, Mar-tial Status and Age Cohort (in 2010 $): with and without sto-

chastic health

without sto-chastic health

with stochastic health

Source: VanDerhei (October 2010)


Employees Currently Ages 25–29 Who are Predicted to Have 31-40 Years of Eligibility: Median 401(k) Accumulation Multiples at Age 65 as a Function of Salary Quartile

voluntary enrollment automatic enrollment

Lowest 1.16945 7.6753

2 2.36987 8.01349

3 3.71124 8.34285

Highest 6.03973 8.52674

0.5

2.5

4.5

6.5

8.5

Post-2009 401(k)"Accumulations" as aMultiple of Final Earn-

ings

Source: VanDerhei (April 2010)


6% 9% 12% 15%

Lowest, Optimistic 0.489 0.6417 0.735 0.792

Highest, Optimistic 0.289 0.41 0.53 0.64

Lowest, Pessimistic 0.457 0.5638 0.6098 0.621

Highest, Pessimistic 0.27 0.3406 0.3876 0.411

5%

15%

25%

35%

45%

55%

65%

75%

85%

Success Rates of Achieving a Combined 80% Real Replacement Rate From Social Security and 401(k) Accumulations,

as a Function of Maximum Employee Contributions from Auto Escalation

Maximum Employee Contributions

Pro

bab

ilit

y

Source: EBRI/ERF Retirement Security Projection Model, versions 100810a1–100810a16.

Source: VanDerhei and Lucas (2010)


Source: VanDerhei (2005)

0%

5%

10%

15%

20%

25%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1936-1940 1941-1945 1946-1950 1951-1955 1956-1960 1961-1965Birth Cohort/Income Quartiles

Figure 3: Reduction in Median Percentage of Additional Compensation That Must Be Saved Annually Until Retirement for a 90% Chance of Covering Expenses, as a Result of Purchasing Long-Term Care Insurance at Retirement (truncated observations

removed)

family

single female

single male

Average Percentage• Lowest income: 8.9%• Second: 20.3%• Third: 16.1%• Highest: 10.6%


Summary: How can the private sector assist?

• Plan design to increase participation and contributions in retirement savings programs

• Impact of moving 401(k) plans to automatic enrollment • Optimal plan design of auto enrollment with auto escalation

• Personal Planning: Educate employees on the potential value of• Contributing a sufficient percentage of compensation• Choosing an age-appropriate asset allocation (or TDF)

• VanDerhei (June 2009) shows how this can substantially mitigate:• Young employees with zero equity exposure• Employees close to retirement with equity allocations that are too high• Extreme concentrations in company stock

• Retiring later • VanDerhei (August 2012) shows how working to age 70 instead of age 65 can increase

the probability of success by 24 percent • SPIAs/longevity insurance

• VanDerhei (2006) shows how annuitization at age 65 can reduce the replacement rate needed for 90 percent probability of success by as much as 24 percent

• LTCI


References

VanDerhei (March 2005), Projections of Future Retirement Income Security: Impact of Long Term Care Insurance. 2005 American Society on Aging/National Council on Aging joint conference

VanDerhei, J. (September 2006). "Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates". EBRI Issue Brief

VanDerhei, J. (June 2009). How Would Target-Date Funds Likely Impact Future 401(k) Accumulations. Testimony before the joint DOL/SEC Hearing, Target Date Fund Public Hearing.

VanDerhei (April 2010), “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 Issue Brief.

VanDerhei (October 2010), Testimony before the Senate Health, Education, Labor and Pensions Committee, on “The Wobbly Stool: Retirement (In)security in America” (T-166).

VanDerhei (May 2012), Testimony before the House Ways and Means Committee, on "Tax Reform and Tax-Favored Retirement Accounts"

VanDerhei, Jack (August 2012). Is Working to Age 70 Really the Answer for Retirement Income Adequacy? EBRI Notes

VanDerhei and Copeland (2010), The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief

VanDerhei and Lucas (2010), The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy, November 2010 EBRI Issue Brief #349

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Appendix

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15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 130% 135% 140% 145%

Lowest–income quartile, all pessimistic

0 0 0 0 0 0.0217

0.0573

0.09 0.1349

0.1968

0.2645

0.3467

0.444 0.5433

0.6362

0.7085

0.7687

0.8046

0.8342

0.8599

0.8822

0.9016

0.9155

0.9271

0.9375

0.945 0.9534

Highest-income quartile, all pessimistic

0.0012

0.0076

0.0227

0.04 0.068 0.1169

0.1861

0.2772

0.3681

0.4568

0.551 0.6263

0.6914

0.7298

0.7632

0.7993

0.8266

0.8529

0.8719

0.886 0.8991

0.9079

0.9201

0.9318

0.9381

0.9442

0.9508

Lowest-income quartile, all optimistic

0 0 0 0 0 0.0194

0.046 0.0593

0.0712

0.0877

0.1097

0.1363

0.1696

0.2078

0.2547

0.3088

0.3661

0.4295

0.5019

0.5742

0.6365

0.6883

0.7288

0.765 0.7849

0.8098

0.8298

Highest-income quartile, all optimistic

0.0012

0.0073

0.0185

0.0239

0.0326

0.0441

0.056 0.076 0.1028

0.141 0.1856

0.2409

0.3001

0.3596

0.4319

0.4955

0.5493

0.6024

0.6443

0.6801

0.7104

0.7342

0.7554

0.779 0.8015

0.8178

0.8361

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

Combined Real Replacement Rate

Source: EBRI/ERF Retirement Security Projection Model, versions 100810a1–100810a16.* Cumulative distribution functions.

Figure 5CDFs* of the Two Extreme Combinations of Design Variables and

Employee Response Assumptions for Employees Currently Ages 25–29 and Assumed 31–40 Years of Eligibility, High- vs. Low-salary Quartiles

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