401(k) participant behavior in a volatile economy prepared for the 14 th annual rrc conference,...
TRANSCRIPT
401(k) Participant Behavior in a Volatile
Economy
Prepared for the 14th Annual RRC Conference, August 2, 2012
byBarbara Butrica and
Karen Smith
1
Background
• DC pensions have become the dominant employer-provided pension type over the last several decades.
• Compared with DB pensions, DC pensions force workers to take charge of their retirement investments.• Whether to participate• How much to contribute• What to invest in and how much
2
What happens to 401(k) contributions in a volatile economy?
• Three recessions • Early 1990s (oil price shock)• Early 2000s (collapse dot-com bubble,
and 9/11)• Late 2000s (stock market crash, housing
collapse, and Great Recession)• Volatility
• Stocks, housing, employment
3
Questions
• How do workers’ 401(k) contributions respond to economic downturns?• Do they stop contributing to DC
pensions?• Do they change their contribution
amounts?• Do they change their asset allocation
with fluctuations in the stock market?• Do responses vary depending on the
size of the downturn?4
Data
• 1996, 2001, 2004, 2008 SIPP• Large representative samples of US households • Includes demographic, economic, and job
characteristics
• Linked to Detailed Earnings Record (DER)• Includes total earnings 1978-2010 and worker
contributions to DC plans 1990-2010
• Sample is person-year file of workers ages 20 to 69 from 1990 to 2010• 905,381 person-year observations• Over 168,000 individuals
5
Methods
• Examine participation of workers by year, age, income (DC contribution>0)• All workers• Workers offered a DC pension (SIPP pension
year)• Examine contribution amount among
participants by year, age, income• Examine asset allocation from SIPP self-
reports• Flows (among contributors)• Assets (among account holders)
• Multivariate analysis of participation, contribution amounts, and stock allocation
6
Methods
• Particular variable of interest is YEAR• Interested in variation around recessions
and stock market crashes.
7
Participation
8
Participation rate among workers ages 20 to 69 increased dramatically over time.
.
9
Participation rate declined slightly with the recent recessions.
.
10
Drop in participation in 2001 and 2008 recessions
Participation rate increased for all workers—particularly those ages 30 to 64.
.
11
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Par
tici
pat
ion
Rat
e
Year
20-29
65-69
60-6430-39
40-49
50-59
They continued to rise through the recessions for workers ages 60 to 69.
.
12
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Par
tici
pat
ion
Rat
e
Year
20-29
65-69
60-6430-39
40-49
50-59
And fell sharply following both the 2001 and 2008 recessions for workers ages 20 to 39.
.
13
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Par
tici
pat
ion
Rat
e
Year
20-29
65-69
60-6430-39
40-49
50-59
The increase in participation rate seems to have plateaued below 50% for workers.
.
14
48%
26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
20-29 30-39 40-49 50-59 60-64 65-69
Par
tici
pat
ion
Rat
e
Age
1966-1970
1961-1965
1956-1960
1951-1955
1946-1950
1941-1945
1936-1940
1931-1935
1926-1930
1921-1925
The increase in participation rates seems to have plateaued below 50% for workers.
.
15
48%
26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
20-29 30-39 40-49 50-59 60-64 65-69
Par
tici
pat
ion
Rat
e
Age
1966-1970
1961-1965
1956-1960
1951-1955
1946-1950
1941-1945
1936-1940
1931-1935
1926-1930
1921-1925
The increase in participation rates seems to have plateaued below 50% for workers.
.
16
48%
26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
20-29 30-39 40-49 50-59 60-64 65-69
Par
tici
pat
ion
Rat
e
Age
1966-1970
1961-1965
1956-1960
1951-1955
1946-1950
1941-1945
1936-1940
1931-1935
1926-1930
1921-1925
Limitation of data
• Do not know if worker is offered a DC plan in the DER data.
• Do know DC offer at the SIPP pension interview.
• Limit the sample to include only workers offered a DC plan.
17
Given an DC offer, two-thirds of workers participate
.
18
38%
22%
41%45% 47%
38%
26%
68%
59%
67%71% 72%
65%
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All 20-29 30-39 40-49 50-59 60-64 65-69
Par
tcip
atio
n R
ate
Age
All Workers
Workers Offered Plan
Over 40 percent of workers can’t participate because they are not offered a DC plan
.
19
39%
23%
42% 46% 46%38%
24%
18%
16%
21% 19% 18%
20%
20%
43%
62%
37% 36% 36%42%
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All 20-29 30-39 40-49 50-59 60-64 65-69Age
Not Offer
Offer Do NotParticipate
Offer andParticipate
Participation rate among workers offered a DC plan fell with the Great Recession at all ages.
.
20
68%
59%
67%71% 72%
65%
55%
65%
56%
65%67% 68%
65%
51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
All 20-29 30-39 40-49 50-59 60-64 65-69
Par
tcip
atio
n R
ate
Age
2006
2009
Contribution Amount
• Include only contributors ages 20 to 69.
21
Median contribution amount among participants fell with the Great Recession.
22
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
lla
rs)
Age
2007
2008
2009
-5.4%
-6.5%
-6.1%
-6.6%
-9.6% -9.2%
-3.4%
Median contribution amount among participants fell with the Great Recession.
23
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
lla
rs)
Age
2007
2008
2009
-5.4%
-6.5%
-6.1%
-6.6%
-9.6% -9.2%
-3.4%
Median contribution amounts among participants fell with the Great Recession.
24
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
lla
rs)
Age
2007
2008
2009
-5.4%
-6.5%
-6.1%
-6.6%
-9.6% -9.2%
-3.4%
Median contributions continued to fall through 2010 for younger participants.
25
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
llar
s)
Age
2007
2008
2009
2010
-5.3%
-12.2%
-6.2%
-8.2%
-6.7% -5.1%
-4.7%
Median contributions continued to fall through 2010 for younger participants.
26
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
llar
s)
Age
2007
2008
2009
2010
-5.3%
-12.2%
-6.2%
-8.2%
-6.7% -5.1%
-4.7%
Median contributions increased in 2010 for older participants, but remain below 2007 amounts.
27
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
All 20-29 30-39 40-49 50-59 60-64 65-69
DC
Co
ntr
ibu
tio
n A
mo
un
t (i
n 2
011
do
llar
s)
Age
2007
2008
2009
2010
-5.3%
-12.2%
-6.2%
-8.2%
-6.7% -5.1%
-4.7%
Changes in median DC contributions closely align with changes in GDP.
28
-4
-3
-2
-1
0
1
2
3
4
519
91
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
Ch
ang
e in
DC
Co
ntr
ibu
tio
n A
mo
un
t (p
erce
nt)
Year
GDP
Median Contribution
Changes in median DC contributions closely align with changes in GDP.
29
-4
-3
-2
-1
0
1
2
3
4
519
91
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
Ch
ang
e in
DC
Co
ntr
ibu
tio
n A
mo
un
t (p
erce
nt)
Year
GDP
Median Contribution
Multivariate Analysis
• Participation• Logistic regression all workers
• Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year
• Logistic regression workers offered DC plan (duration of pension job at SIPP interview)• Control for age, earnings, number of work years since
age 20, job change, job loss, SIPP panel, year• Marital status, change in marital status, spouse
employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan. 30
Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year)
31
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Par
tici
pat
ion
Bet
a
Year
All Workers
Workers Offered Pension
Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year)
32
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Par
tici
pat
ion
Bet
a
Year
All Workers
Workers Offered Pension
Multivariate Analysis
• Contributions• OLS regression all participants
• Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year
• OLS regression all participants from 1990-SIPP• Control for age, earnings, number of work years since
age 20, job change, job loss, SIPP panel, year• Marital status, change in marital status, spouse
employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan.
33
Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year)
34
-200
-100
0
100
200
300
400
500
600
700
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
OL
S p
aram
eter
est
imat
e fo
r Y
ear
Year
All Participants 1990-2010
Participants 1990 to SIPP
Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year)
35
-200
-100
0
100
200
300
400
500
600
700
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
OL
S p
aram
eter
est
imat
e fo
r Y
ear
Year
All Participants 1990-2010
Participants 1990 to SIPP
What does this mean for retirement saving?
• Simple simulation• Baseline uses observed median DC
contributions for 30-39-year-olds from 2007 to 2010.• Assume 3 percent real growth on accumulations• Assume workers increase annual real contributions by
1 percent each year after 2010.• Alternate uses observed 2007 median DC
contribution for 30-39-year-olds.• Assume 3 percent real growth on accumulations• Assume workers increase annual real contributions by
1 percent each year after 2007.
• Only difference is the DC contributions for 2008-2010. 36
For a typical 30-year-old, simulated retirement saving is 9.1 percent lower at age 62 because of the recession.
37
0
500
1,000
1,500
2,000
2,500
3,000
3,500
30 35 40 45 50 55 60
DC
Co
ntr
ibu
tio
n ($
2011
)
Age
Baseline
Alternative Scenario
$142,141
$130,233
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
30 35 40 45 50 55 60
Re
tire
me
nt
Sa
vin
g (
$2
011
)
Age
Baseline
Alternative Scenario
Account holders were less likely to invest in stocks after the 2008 economic melt-down but contribution allocations remained stable
38
52%49% 50%
59%64%
53%
0%
10%
20%
30%
40%
50%
60%
70%
2003 2006 2009
Pro
babi
lity
of In
vest
ing
in
Equ
ities
Year
Contributions
Balances
Conclusions• Less than half of workers participate in
DC plans.• 40 percent don’t participate because their
employers don’t offer a plan.• Median contributions are well below the
statutory limit.• Workers don’t save adequately even in
economic booms. They save less in recessions.
39
Conclusions• Workers do lower DC participation and
contributions during recessions.• Lower contributions precede the recession. • Lower participation lags behind the recession.
• The Great Recession will lower retirement saving for the typical 30-year-old today by about 9 percent.• The impact is greater for higher-income workers
and for workers farther from retirement.• Some evidence that investors buy high and sell
low—locking in investment losses.• Financial literacy could improve retirement saving
40