Trends in Retirement Programs and Income

Dallas Salisbury, President & CEO

Employee Benefit Research Institute

www.EBRI.org

www.choosetosave.org

June 10, 2008

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Retirement Plan Trends: Number of Plans

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1975 1980 1985 1990 1995 2000 2005

Total DB DC K

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Retirement Total Participation Trends: Including Multiple-Plan Counting

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1975 1980 1985 1990 1995 2000 2005

Workforce Total DB DC

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Retirement Active Participation Trends: Including Multiple Plan Counting

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1975 1980 1985 1990 1995 2000 2005

Workforce Total DB DC K

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Retirement Asset Trends

$0

$1

$2

$3

$4

$5

$6

1975 1980 1985 1990 1995 2000 2005

($ M

illio

ns)

Total DB DC K

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Retirement Plan Contribution Trends

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

1975 1980 1985 1990 1995 2000 2005

Total DB DC K

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Retirement Plan Net “Contribution” Trends

($120,000)

($100,000)

($80,000)

($60,000)

($40,000)

($20,000)

$0

$20,000

$40,000

$60,000

1975

1980

1985

1990

1995

2000

2005

Total DB DC K

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What Employers Spend on Benefits

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Factors

How much is being saved

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Actual Contributions Versus Needed Contributions

Factor All Workers Baby Boomers

% on track to replace 80% with SSA included 15% 15%

Saving rate 3.5% 4.1%

Needed rate 12% - 19% 18%-27%

Source: Fidelity RI Retirement Index, March 2007

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Income quartile at age 65

Percent of final five-year average salary

*The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances.Source: Tabulations from the EBRI/ICI 401(k) accumulation projection model

Baseline Don't always have a 401(k)67.2

39.4

59.554.0

50.7

27.724.723.223.2

1 2 3 4

27.5 30.8 34.7

Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 & 2039

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Factors

How much is being saved

How much is needed

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SSA replaces 27% of salary at the maximum wage base and 39% at the average income

Medicare pays for about 50% of retiree health costs

2005 SSA Med

Male 243,174 130,586

Female 306,263 152,963

Couple 515,532 283,549

Avg LE M 81 F 85

Source: Urban Institute, 2006

r e

t i r

e m

e n

t t

r e

n d

s

Matching the Value of SSA and Medicare to Average Life Expectancy

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Risk Acceptance 2008 2018

50% MD $194,000 $325,000

75% MD $253,000 $424,000

90% MD $305,000 $511,000

90% Drugs $654,000 $1,064,000

Savings Needed for Retiree Health Benefits:Age 65 in 2008 and 2018 (couples)

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Starting at age 20 and saving consistently for 47 years will support a long life at rates many are now saving.

Waiting until 40 or 50 moves the numbers to the stars unless retirement is delayed.

How much do you need to save if you work until 67?

0

5

10

15

20

25

30

35

40

45

75 80 85 90 95 100

20

40

50

Responsibility for Longevity Risk Requires Greater Individual Savings

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Target Final Earnings Multiples: High Income

Probability of Retirement Adequacy

Male Retiring at 65

Female Retiring at 65

50% 4.13 5.29

75% 7.14 10.13

90% 11.9 13.86

Source: EBRI Issue Brief September 2006

Single retiree less than $40,450

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Target Final Earnings Multiples: Low Income

Single retiree less than $15,000

Probability of Retirement Adequacy

Male Retiring at 65

Female Retiring at 65

50% 10.67 16.22

75% 22.85 34.23

90% 41.99 54.22

Source: EBRI Issue Brief September 2006

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Factors

How much is being saved

How much is needed

Longevity

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Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health.

Couple(Both Age 65)

FemaleAge 65

Age 92

50% chance of one survivor

MaleAge 65

Age 88 94 100

Age 85 92 100

50% chance 25% chance

50% chance 25% chance

25% chance of one survivor

97 10095

9590

90

9085

85

People Are Likely to Live Longer Than They Think!

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“I think you should be more explicit here in Step Two.”

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Factors

How much is being saved

How much is needed

Longevity

Probability of not running out desired

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Income Annuity – Fully Indexed

Confirmation Code: 19NXXX2B5SAZ08C001

Primary Annuitant -- Birth date: 04/01/1947   Sex: MQuote Expiration Date: 03/18/2008Benefit Commencement Date: 05/01/2008State of Residence: AZPayments per Year: 12Total Premium Amount: $200,000.00

Initial Payment Amount for Fixed Single Life Annuity with inflation adjustments: $912.12

Cancellation Option Selected: No

Qualified Assets: Yes

Source:https://personal.vanguard.com/us/accounttypes/retirement/ATSAnnuitiesOVContent.jsp

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How Much Does Portfolio Matter at 90% Confidence level?

$500

$880

$540

$920

$560

$920

$580

$920

$560

$900

$560

$880

$560

$840$916

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

A C E G

40 years 20 years

$200,000 at age 60 – 90% chance of income for 20 and 40 yearsPortfolio D is a 40/40/20 mix (equity/bond/cash)

Source:www3.troweprice.com/ric/RIC/

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How much does probability matter?

$480

$780

$580

$920

$620

$1,000

$680

$1,040

$720

$1,100

$760

$1,140

$916

$0

$200

$400

$600

$800

$1,000

$1,200

99% 80% 60% AnnuityI

40 years 20 years

$200,000 at age 60 – 90% chance of income for 20 and 40 yearsPortfolio D is a 40/40/20 mix (equity/bond/cash)

Source:www3.troweprice.com/ric/RIC/

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Worker Knowledge a Concern

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0

10

20

30

40

50

60

70

80

60-64 65-69 70-74 75-79 80-84 85+ 65+

Earnings SSA Private DB

Public DB Annuities Asset Income

0

10

20

30

40

50

60

70

80

60-64 65-69 70-74 75-79 80-84 85+ 65+

Earnings SSA Private DB

Public DB Annuities Asset Income

1977 2007

Percentage of Income, by Age, for the Retired Population, 1977 and 2007

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Financial Literacy

Low

Not a priority in schools or later

Efforts offset by spend and borrow consumption culture

Not high for participants

Essential if income is not annuitized and there are assets to manage

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Principles of Retirement Readiness

Early participation, consistent high contributions, and preservation

Early ballpark e$timate® of savings needed and annual update

Diversified asset allocation with reasonable costs and risk/age based re-balancing

Ongoing total life financial education, planning and implementation

Employer recognition of value to short term and long term productivity and profitability

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Helping Participants Navigate

How much can you afford to save?

Might you borrow this money?

How long do you think you will be with this employer?

Might you cash out at job change?

Is this your only savings?

Would you sell if the market dropped?

How willing are you to lose money?

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Getting Participation Up

Default enrollment with matching contribution highest rates

Default enrollment with no match near tie

Voluntary enrollment with match near tie

Voluntary enrollment with no match next

Voluntary IRA with payroll deduction next

Voluntary IRA on own lowest

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Getting Contributions Up

Automatic employer contribution best

Default contribution next

Auto escalation essential feature over long term – or less will be saved

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Preservation A Growing Focus

Job change and low balance losses

Loan and hardship losses

Employers increasingly seek to keep funds in the plan at job change

Employers increasingly focused on at retirement withdrawal method and options

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Public Policy – 2008 and Beyond

Social Security and Medicare as Focus

Mandatory savings considered but unlikely

Due to low incomes, tax loads, and health costs

Employer plans and IRA’s likely to be put to effectiveness test – tax restrictions? Fee rules?

Later retirement ages for those able to work

Low disability and SSA incomes for those not healthy enough to work

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Dallas L. SalisburyPresident and CEO

Employee Benefit Research Institute

www.ebri.org and www.choosetosave.org

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