van derhei presentation for may 20, 2009 perab meeting

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© Employee Benefit Research Institute 2009

Presentation for the President's Economic Recovery Advisory Board

Retirement and Savings Working Group

May 20, 2009

Jack VanDerhei

Research Director, EBRI

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Topics

• Decline in defined benefit plans – impact on future retirement income• How to modify defined contribution plans to improve retirement income

security– PPA modifications for automatic enrollment/automatic escalation of contributions– Target date funds: empirical and counterfactual evidence– Impact of annuitization on enhanced retirement income security

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Previous analysis of pension freezes• VanDerhei, Defined Benefit Plan Freezes: Who’s Affected, How Much, and Replacing Lost Accruals, EBRI Issue

Brief, March 2006– Simulate loss of DB wealth if CURRENT employees had pension accruals frozen– Simulate the ENHANCED contribution plan sponsor would need to provide for the remainder of the employee’s tenure to financially indemnify

them– Ran under two alternative ror’s: 4 and 8 percent

• final-average plan @ 4 percent: median rate is 13.5 percent, and the threshold rate for the 75th percentile increases to 21.0 percent.

• Munnell, Golub-Sass, Soto, and Vitagliano, Why Are Healthy Employers Freezing Their Pensions? CRR, March 2006

– Offers four possible explanations why employers are shutting down their plans

• VanDerhei, “Retirement Income Adequacy after PPA and FAS 158: Part One—Plan Sponsors’ Reactions.” EBRI Issue Brief, July 2007

– EBRI/Mercer survey fielded in April 2007 • Provides sponsors with sufficient time to have done a cost/benefit analysis of their plan design options• 162 responses

– Collects information on generosity parameters• Both DB and DC• Both pre and post plan change (if any)

– Allows us to compute the distribution of enhanced DC contributions for plan sponsors instituting a DB freeze

• Munnell and Soto, CRR WP 2007-22 (December 2007)– Explores the relationship between the probability that a plan was frozen and characteristics of the plan, the firm, and the industry

• Butrica, Iams, Smith, and Toder, The Disappearing Defined Benefit Pension And Its Potential Impact On The Retirement Incomes Of Boomers, CRR WP 2009-2

– uses the Model of Income in the Near Term to simulate the impact of an accelerated transition from DB to DC pensions on the distribution of retirement income among boomers

– scenario in which employers freeze all remaining private sector DB plans and a third of all state and local plans over the next five years

• VanDerhei and Copeland, The Role of Private Defined Benefit Pension Plans in US Retirement Income: Past, Present and Future Scenarios, Pension Research Council Spring 2009 Conference

– Simulation of expected FUTURE accruals/account balance increases at age 65 from:• defined benefit accruals under new jobs and • defined contribution plans account balances from ENHANCED contributions (if any) as a quid pro quo resulting from a freeze

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Expected CONDITIONAL percentage point reduction in nominal replacement rates if all private defined benefit plans were to freeze accruals for NEW employees immediately, by age

0%

1%2%

3%4%

5%6%

7%8%

9%

20 25 30 35 40 45 50 55 60

Age cohort (min age specified)

Red

uct

ion

in

no

min

al

rep

lace

men

t ra

tes

median

mean

Source: Author’s simulations based on April 2009 version of EBRI/ERF Retirement Security Projection Model™

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Percentage of those with "lost" DB wealth due to a pension freeze who are expected to have a larger total nominal replacement rate from the DC enhanced contributions (if any)

0%

5%10%

15%20%

25%30%

35%40%

45%

20 25 30 35 40 45 50 55 60



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Median percentage of compensation required as an ENHANCED employer contribution for future years covered by a defined contribution plan in lieu of a frozen defined benefit plan for financial indemnification.

0%

2%4%

6%8%

10%12%

14%16%

18%

20 25 30 35 40 45 50 55 60



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Automatic enrollment with and without automatic increase vs voluntary enrollment: 50th percentiles

Results for those currently 25-29

0

2

4

6

8

10

Low 2 3 High

Salary quartile

Post-PPA 401(k) accumulations as a multiple of final

earnings

AE wo escalationVoluntaryAE w escalation

Source: VanDerhei and Copeland, “The Impact of PPA on Retirement Savings for 401(k) Participants”, EBRI Issue Brief, June 2008

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Sensitivity analysis on automatic increase assumptions: 50th percentiles

Results for those currently 25-29

0

2

4

6

8

10

12

14

1 2 3 4

Salary quartile (1=lowest, 4 = highest)

Post-PPA 401(k) accumulations as a

multiple of final earnings

rcs optouts, auto increaseto 6 percent, remember =0



0 percent optouts, autoincrease to 6 percent,remember = 0

0 percent optouts, autoincrease to 10 percent,remember = 1

Source: VanDerhei and Copeland, “The Impact of PPA on Retirement Savings for 401(k) Participants”, EBRI Issue Brief, June 2008. Note: RCS optouts represent the distribution of maximum deferrals from survey participants described in VanDerhei, The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income, EBRI Notes, September 2007

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Figure 5. Dec. 31st Asset Allocation Distribution of 401(k) Participant Account Balances to “Equity,” by Age: 2006, 2007 and 2008

0%

10%

20%

30%

40%

50%

60%

up to 35 up to 35 up to 35 36-45 36-45 36-45 46-55 46-55 46-55 56-65 56-65 56-65

2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008

0.7-0.8

0.8-0.9

>0.9

“Equity” is defined as equity funds + company stock + the relevant portion of balanced and target date funds

Sources: 2006: Tabulations from year-end 2006 data from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. The analysis is based on active participants w ith account balances at the end of 2006.2007: Tabulations from year-end 2007 data from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. The analysis is based on active participants w ith account balances at the end of 2007.2008: Author's projections based on year-end 2007 data from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Methodology is explained in the paper.

Dec. 31 Asset Allocation Distribution for 401(k) Participant Account Balances to “Equity,” by Age: 2006, 2007, 2008

Source: VanDerhei, “The Impact of the Recent Financial Crisis on 401(k) Account Balances” EBRI Issue Brief, February 2009

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Figure 6. Median "excess" returns from Target Date funds by Participant Age and Investment Style : 2000-2006

The "excess" is calculated by comparing the projected account balances generated by target date funds to actual account balances

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

21-35 36-45 46-55 56-65 21-35 36-45 46-55 56-65 21-35 36-45 46-55 56-65

average average average average mostaggressive

mostaggressive

mostaggressive

mostaggressive

mostconservative

mostconservative

mostconservative

mostconservativeNotes:

1. All asset allocations for target date funds are based on 2007 data.2. Due to inconsistencies in plan loan data provision, there is a slight negative bias to the computed value of the "excess" returns. This w ill be quantif ied at a later stage.Source: Author's calculations based on consistent sample data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project.

Median “Excess” Returns from Target Date Funds,

by Participant Age and Investment Style: 2000–2006

Source: VanDerhei, “Frozen Pensions and Falling Stocks: What Will Happen to Retirees' Incomes?” Urban Institute, February 3, 2009

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Source: VanDerhei and Copeland, “ERISA at 30: The Decline of Private-Sector Defined Benefit Promises and Annuity Payments? What Will It Mean?” EBRI Issue Brief, May 2004

van derhei presentation for may 20, 2009 perab meeting

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