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