Returns “Engagement”

An acquaintance of mine once remarked, “you can’t solve a savings problem with investment returns.” Yet, participants frequently focus on the returns of their retirement savings investments.

Consider that during the month of May, major stock indexes like the Dow Jones Industrial Average and the S&P 500 were off 6 percent. But, according to an EBRI analysis, the estimated average 401(k) account balance¹was down less than 3 percent during that same month, both due to the inflow of ongoing contributions and more diversified portfolio holdings.

That determination is based on estimates from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project—the largest, most representative repository of information about individual 401(k) plan participant accounts. In fact, as of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

Using that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has produced estimates of the cumulative changes in account balances—both as a result of contributions and investment returns— for several combinations of participant age and tenure.

While the estimated monthly movements² are interesting, they aren’t nearly as important as the perspective the database offers on long-term trends. For example, while the financial crisis of 2008 had a significant impact on retirement savings balances, as of June 5, 2012, more than 94 percent of the consistent participants in the database are estimated to have balances higher than they did at the pre-recession market peak (October 9, 2007).

During election cycles, voters are frequently asked “are you better off now than you were four years ago?” The answer, at least when it comes to consistent participants and their retirement savings accumulations, would seem to be “yes.”

- Nevin E. Adams, JD

Notes

¹ For “consistent” participants, that is, participants assumed to be in the 401(k) plan at the beginning and end of the specific reporting period.

² EBRI updates the change in 401(k) balances each month at http://www.ebri.org/index.cfm?fa=401kbalances. Here you will find both a listing of “Cumulative Change”, a projected cumulative percentage change in account balances for consistent participants since the last annual update of the database. Additionally, the monthly rate of change in average account balances is presented for those same individuals. For assistance on interpreting these results, please contact Jack VanDerhei at vanderhei@ebri.org

“Better” Pill?

As a growing number of Americans near and enter retirement, concerns about the cost of post-retirement health care expenses loom larger. In fact, worker confidence about their ability to pay for medical expenses after retirement was just half what they expressed about their ability to pay for basic retirement expenses (see EBRI’s2012 Retirement Confidence Survey).

Little wonder, since a recent EBRI Issue Brief noted that health-related expenses are not only the second-largest component in the budget of older Americans, they are the only component which steadily increases with age (see “Expenditure Patterns of Older Americans, 2001‒2009”).

Recognizing the potential financial impact, recent industry surveys have put a figure on the cost of post-retirement health care expense¹—a figure above and beyond that of merely living in retirement. EBRI has gone to great lengths to model the major risks to retirement income adequacy all the way back to the introduction of the EBRI Retirement Savings Projection Model (RSPM)® in 2003, including the incorporation of stochastic health care risks, such as nursing home and home health care costs.²

The RSPM has incorporated those expenses because, while those events will not be experienced by all retired households, or experienced to the same extent, when they do occur they can have catastrophic financial consequences for a household’s future retirement income adequacy. Many attempts to model retirement income adequacy either ignore this risk altogether, or just assume that all households purchase long-term care insurance at retirement—the former ignores a significant financial reality, while the latter glosses over reality.

Indeed, a major limitation of using income replacement rates as an accumulation target is that doing so generally fails to take into account these potentially catastrophic costs. How much difference does this make? A recently updated version of the RSPM³ shows that, with the financial impacts of long-term care (nursing home and home health care costs)modeled, 68 percent of single male Gen Xers are projected to have no financial shortfall in retirement. On the other hand, if those long-term care costs are ignored, fewer than one-in-ten would be projected to run short of funds in retirement. Similar results were found for single female and married Gen Xers.

The gaps are even more noticeable if you focus only on the situation of individuals with projected shortfalls in excess of $100,000. Ignoring long-term care costs, fewer than 1 percent of single male or married Gen Xers are projected to have shortfalls in excess of $100,000; however when you take those costs into account, approximately 18 percent of single males and 10 percent of families are now in this range, according to the model. The results are even more pronounced for single females, where ignoring those long-term care costs would indicate that fewer than 5 percent are modeled to experience shortfalls of more than $100,000, compared with approximately 34 percent when this reality is factored in.

It’s clear that those long-term care costs can be significant, and can have a dramatic impact on retirement security.

What’s less clear is why projections of retirement income needs and preparedness would continue to overlook them.

Nevin E. Adams, JD

Notes

(1) For more information, see “The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare,” EBRI Notes, August 2011, online here.

(2) The Retirement Security Projection Model® (RSPM) was developed in 2003, and in 2010 it was updated it to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM to account for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010. For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,®” online here.

(3) More information about this update will be published in June 2012 EBRI Notes.

Halfway, Honed

Last week we published¹ the results of an update of EBRI’s Retirement Readiness Rating from the Retirement Security Projection Model® (RSPM). That model, which has been modified over the years to take into account certain structural and market changes,² projects that more than half (56 percent) of Boomers and Gen Xers will be able to retire with enough money to cover the cost of basic retirement needs as well as uninsured health care costs, including stochastic expenses from nursing home and home health care.³

On the other hand, that same model projects that about 44 percent won’t have “enough” to cover those expenses.

It’s worth noting that the trends are positive. Even after the toll of the 2008 financial crisis, the 2012 number of those at risk of running short is some 5−8 percentage points “better” than what was found in 2003. Moreover, the analysis is able to point to some important trends; eligibility for a workplace retirement plan remains a significant factor in reducing the risk of running short⁴, while the more recent broad-based advent of automatic enrollment plan designs makes it ever more likely that those eligible to participate—particularly lower-income workers—do so.

The research does point out that lower-income households are much more likely to be at risk for insufficient retirement income,⁵ even though basic retirement expenses are modeled as a function of the household’s expected retirement income. In fact, the 2012 baseline ratings for Early Boomers range from a projection that 87 percent of the simulated lifepaths for the lowest-income households are at risk in retirement to only 13 percent of retired highest-income households.

Obviously, the reality of more than 4 in 10 Americans not having sufficient post-retirement wealth is of concern, though I find that many are pleasantly surprised at how high a percentage is expected to have sufficient assets. Indeed, whether one draws comfort from that finding likely depends on your expectations (and perhaps on which side of that line you think you might find yourself post-retirement).

Regardless of those expectations—and whether you find the picture to be one of a glass half full or half empty—the data give us all something to work with, and to work toward.

- Nevin E. Adams, JD

¹ EBRI Notes May 2012, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,®” online here. http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5062

² The Retirement Security Projection Model® (RSPM) was developed in 2003, and in 2010 it was updated it to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010.

A household’s simulated lifepath in retirement is considered to be at risk in the baseline version of the model if its aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures, defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) as well as some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care (at least until the point such expenses are picked up by Medicaid). The resources in retirement are assumed to consist of Social Security (status quo benefits for the baseline version of the simulation); account balances from defined contribution plans; individual retirement accounts (IRAs) and/or cash balance plans; annuities or lump-sum distributions from defined benefit plans; and net housing equity (in the form of a lump‐sum distribution at the point that other financial resources are exhausted). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates and other thresholds.

⁴ For an idea of just much of an impact plan eligibility makes, consider that, according to the simulation results, Gen Xers with no future years of eligibility would run short of money in retirement 60.7 percent of the time, whereas fewer than 1 in 5 (18.2 percent) of those with 20 or more years of future eligibility would run this risk.

⁵ In addition to underlining the importance of automatic enrollment for the lowest income, this also underlines the importance of Social Security as a post-retirement income source for this group.

State “Capital”

I recently had the opportunity to attend The National Financial Capability Study Roundtable, where a variety of researchers (including EBRI’s Sudipto Banerjee) presented, discussed, and challenged a variety of research papers on topics ranging from financial literacy and retirement planning to financial advice, and from financial literacy and financial behavior to “Prohibition, Price Caps and Disclosure”. Taken as a whole, the day’s discussions focused on ways to better understand and measure the factors that appear to influence individual behaviors regarding their finances.

Simply stated, financial literacy is generally described as the ability to understand finance. More recently, some have begun to focus on financial capability¹. Research has shown that people with higher levels of financial literacy approach retirement with much higher levels of wealth. However, a growing body of research also suggests that most Americans have limited knowledge about concepts such as inflation, compound interest, and risk diversification at a time when they face an increasingly complex financial planning process alongside an expanding set of saving, investment, and decumulation options.

Drawing on data from the National Financial Capability Study (NFCS)², designed by the FINRA Investor Education Foundation (an ASEC member firm), Dr. Banerjee’s report³ noted that the chances of having a bad financial behavior decreases with age, and that the chances of exhibiting a bad financial behavior go down with education and income. Interestingly enough, full-time and part-time workers, homemakers, sick or disabled, and unemployed or laid-off individuals were all more likely to have bad financial behavior than self-employed people.

That said, the report specifically examined the role of where you live – specifically the state in which individuals live – in explaining financial literacy and behavior. It also ranked all U.S. states in terms of financial literacy and financial behavior of its residents.

Financial literacy and financial behavior are strongly associated with an individual’s age, income, education and other demographic characteristics. The study shows that, after controlling for the effect of these individual demographic characteristics, most bottom-ranked states had a statistically significant effect on their residents’ financial literacy and almost all states have a statistically significant effect on their residents’ financial behavior. However, the chance of exhibiting “worse”financial behavior increased as the financial behavior ranking dropped.

According to the report, this suggests that there might be factors shaping individual financial literacy and behavior other than individual demographic characteristics – and they might be influenced by the state in which people live.

- Nevin E. Adams, JD

¹ The National Financial Capability Study identifies four key components of financial capability as (1) making ends meet, (2) planning ahead, (3) managing financial products, and (4) financial knowledge and decision-making. See http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf

² The National Financial Capability Study is available online at http://www.finrafoundation.org/programs/p123306

³ Banerjee’s paper, including the state rankings, is online at https://custom.cvent.com/09056B0B33C34EC2BECC8C4A235B766F/files/event/51EB0D7B12344774B422F6A615E9B8B9/0c08c7cd98d74c01bf954ad368275ff4.pdf. See also“How Do Financial Literacy and Financial Behavior Vary by State?” in EBRI Notes, November 2011 at http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4936

“Opportunity” Costs

When I was 16, my family moved from a small town in Southern Illinois to the suburbs of Chicago. It was a move that was to change my life in ways I could not have even imagined at the time. Had that move not occurred, I’d likely have wound up at a different university, might well have chosen a different major, and almost certainly would never have stumbled across the college internship doing pension accountings that has, many years later, brought me here today.

As you might expect, those possibilities were not obvious to me at the time of that move. But looking back, the reality is that that move greatly expanded the life choices—and thus, the opportunities—available to me at a particularly critical point in my life.

At EBRI’s Research Committee meeting this past week, Research Director Jack VanDerhei shared the updated findings of the EBRI Retirement Readiness Rating (RRR), which will be published later this month. The Retirement Readiness Ratings measure the percentage of simulated life paths in retirement that are at risk of inadequate retirement income. Simply stated, a household’s simulated lifepath in retirement is considered to be at‐risk in the baseline version of the model if its aggregate resources in retirement are not sufficient to cover their aggregate minimum retirement expenditures(1). Previous research by EBRI has demonstrated that one of the most important factors contributing to retirement income adequacy for the Baby Boomers and Gen Xers is eligibility to participate in employment-based retirement plans.

In fact, the updated version or the RRR shows that the number of future years workers are eligible for participation in a defined contribution plan makes a tremendous difference in their at-risk ratings. For example, according to the simulation results, Gen Xers with no future years of eligibility would run short of money in retirement more than half (60.7 percent) of the time—a circumstance that would effect just 1 in 5 of those in that demographic with 20 or more years of future eligibility.

And, bear in mind, that’s the kind of difference in outcome that results from mere ELIGIBILITY, thanks to their likely participation when a program is available, boosted by design enhancements like automatic enrollment and contribution acceleration.

My kids have the chance to learn from my past—to ask about the availability of a workplace retirement savings plan during their job interviews—and to take early advantage of that opportunity.

After all, it’s hard to take advantage of an opportunity you don’t have.

- Nevin E. Adams, JD

(1) In EBRI’s RRR, aggregate minimum retirement expenditures are defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income and age) and some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point such expenses are picked up by Medicaid). The resources in retirement will consist of Social Security (status quo benefits for the baseline version of the simulation), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities or lump-sum distributions from defined benefit plans (unless the lump‐sum distribution scenario is chosen), and (in some cases) net housing equity (in the form of a lump‐sum distribution at the point that other financial resources are exhausted). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard‐of‐living, and other thresholds. More information on the RRR is available in the July 2010 EBRI Issue Brief online here.

Confidence Intervals

Last week, House Ways and Means Committee Chairman Dave Camp (R-MI) released a report that included responses from more than 70 percent of America’s Fortune 100 companies—a report that indicated that those employers could “save hundreds of millions of dollars a year under the new health care law by simply terminating health insurance for their workers and dumping these employees into taxpayer-funded health care exchanges.”

This, of course, follows recent arguments challenging the constitutionality of the Patient Protection and Affordable Care Act (PPACA) before the United States Supreme Court—with a ruling anticipated by the end of June. At which point, regardless of the outcome, healthcare reform seems likely to remain an issue for the 2012 political campaign.

What remains to be known is what that will mean for employment-based health coverage⁽¹⁾—and American’s confidence in their health care system.

Last year, EBRI’s Health Confidence Survey⁽²⁾ noted that, in 2011, 57 percent of individuals with employment-based coverage were extremely or very confident that their employer or union would continue to offer health coverage. That was down from 68 percent in 2000, but most of that erosion occurred between 2000 and 2002.

Indeed, other than a one-year dip in 2010 (to 52 percent), the percentage who were extremely or very confident has remained just below 60 percent. And, for the very most part, individuals who had such coverage were satisfied with it (60 percent of those with health insurance coverage are extremely or very satisfied with their current plan, and 29 percent were somewhat satisfied—see this EBRI analysis, online here.

The 2011 HCS⁽³⁾ did highlight some areas of concern. While more than half (56 percent) said they were extremely or very satisfied with the quality of the medical care they have received in the past two years, just 18 percent were extremely or very satisfied with the cost of their health insurance, and only 15 percent were satisfied with the cost of health care services not covered by insurance. Moreover, the 2011 HCS also found that individuals have a low level of confidence that they can afford to purchase health coverage on their own—even if their employer or union gave them the money to do so.

This year’s Health Confidence Survey (HCS) will be fielded in July, allowing time for the Supreme Court’s ruling to come to light, so that survey respondents can better assess and reflect on its impact on their circumstances. In this, the 15^th annual HCS, the issues of health care cost, coverage, quality, and confidence in the future of the employment-based system are, if anything, more important than ever—and the need for a clear understanding of the American public’s attitudes on health care never greater.

- Nevin E. Adams, JD

Endnotes

(1) The Congressional Budget Office recently revised its estimates of the number of people projected to have employment-based coverage in the future. In a recent blogpost, Paul Fronstin, director of EBRI’s Health Education and Research Program, said: “As the CBO notes in a footnote for its 2019 estimates, as a result of PPACA, about 14 million fewer people are expected to have employment-based coverage (about 11 million individuals will lose access to employment-based coverage, and another 3 million will decline employment-based coverage and enroll in health insurance from a different source), while about 9 million will newly enroll in employment-based coverage under PPACA.”

(2) The HCS is co-sponsored by the Employee Benefit Research Institute (EBRI), a private, nonprofit, nonpartisan public policy research organization, and Mathew Greenwald & Associates, Inc., a Washington, DC-based market research firm. The 2011 HCS data collection was funded by grants from 12 private organizations. Staffing was donated by EBRI and Greenwald & Associates. HCS materials and a list of underwriters may be accessed at the EBRI website: www.ebri.org/hcs If your organization would like to help underwrite the 2012 HCS, please contact Ken McDonnell, at (202) 775-6367, or e-mail: mcdonnell@ebri.org or Paul Fronstin at (202) 659-0670, or e-mail: fronstin@ebri.org

(3) Additional information from the 2011 HCS is online here.

What’s Next?

In just a couple of weeks, tens of thousands of students (including a daughter of mine) will graduate from college. For most, it’s a journey of joys, trials and tribulations, an education, not just from a textbook or a professor’s wisdom, but the insights that one can only get from actually living through a different stage of life. Those students set out upon that journey years ago, and, doubtless following careful deliberation and the counsel of friends, families, and a few trusted advisors, a course was set. A course that many “adjusted” – by choice and sometimes of necessity – over the course of the last few years, but a course for their future, nonetheless.

Now the question is – what will they do next?

As parents, we spend a lot of time, energy, and money trying to help our children make good choices, but at a certain point, most of us step back, grit our teeth (and sometimes close our eyes), and hope that they do. Those decisions aren’t always the ones we would make – but, ready or not, they are made, sometimes for the better, sometimes not.

Similarly, this industry has expended a lot of time, energy, and money over the years to try and help individuals make good decisions about preparing for retirement. A growing number of individuals are now entering this new stage in their lives, and we ask ourselves, “Are they ready?”

In answer to that question, we can look at their individual situations and make certain projections about that readiness, based on their health, their gender, their income levels pre-retirement, and their likely levels of spending post-retirement, among other things[i]. But what will ultimately matter is what they do next – and that’s a factor not just of how much savings they have (or think they have) at the point of retirement, or the amount of other resources they may have available then (and thereafter), but how those resources are now invested, how they are invested over time, and how - and when – those resources are spent.

The factors that influence those decisions, as well as their results and potential consequences will, of course, continue to be a key focus for EBRI[ii]in the years to come – just as EBRI’s nonpartisan gathering, analyzing, and modeling the impact of behavioral, plan design, and regulatory influences has provided critical insights on those individual preparations for nearly thirty-five years now.

It matters because knowing what this generation does “next” is likely to be an important part of helping the next generation do better.

- Nevin E. Adams, JD

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[i]See EBRI Issue Brief July 2010 for more information on the EBRI Retirement Readiness Rating™ at http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4593. The 2010 update uses the most recent data and considers retirement plan changes (e.g., automatic enrollment, auto escalation of contributions, and diversified default investments resulting from the Pension Protection Act of 2006) as well as updates for financial market performance and employee behavior (based on a database of 24 million 401(k) participants). Results will be updated next month, in our May Issue Brief.

[ii]More information on the EBRI Center for Research on Retirement Income is available at http://www.ebri.org/research/retirement-research-centers/retirement-savings-income/. For information about becoming a Research Partner, contact Nevin Adams, at nadams@ebri.org.

"After" Math

Last week, EBRI Research Director Jack VanDerhei testified[i]before the House Ways & Means Committee on the subject of “Tax Reform and Tax-Favored Retirement Accounts”, a hearing described as considering “…the current menu of options for retirement savings—both with respect to employer-based defined contribution plans and with respect to IRAs.” According to Committee Chairman David Camp (R-MI), the hearing was to “…explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.”

That hearing preceded by just a day Senate Budget Committee Chairman Kurt Conrad’s (D-North Dakota) unveiling of his Fiscal Commission Budget Plan (see link here). That plan[ii]referenced the original Bowles-Simpson Fiscal Commission’s “Illustrative” Tax Reform option under which the exclusion for employer-provided health insurance would be modified, capping its value for five years and then phasing it out over 20 years, while retirement savings accounts would be consolidated, with a cap on tax-preferred contributions.[iii] 

While the prospects for actual legislation ahead of the November election seem unlikely, it is clear that concerns about the nation’s budget deficit will keep tax reform—and the tax status of workplace benefit programs—front-and-center in the weeks and months to come.
Appropriately enough, next month EBRI will host its 70^th policy forum, titled "’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” At this semi-annual policy forum, panels of experts will deal with a variety of pertinent and timely issues, including the potential impact of changes to current tax incentives for employee benefits, and the “true cost” of tax deferrals. 
We’ll also talk about what 401(k)/defined contribution plans are delivering, and what individuals actually do after retirement with respect to their retirement savings, as well as optimal approaches on retirement income designs for defined contribution plans. We’ll even look around the globe for some potential lessons to be drawn from international comparisons.

It’s a day of information, interaction, and networking that you won’t want to miss.

However, seats are limited—reserve your place today. You can’t afford not to.

A copy of the full Policy Forum agenda, and registration information is online here.

- Nevin E. Adams, JD

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[i]A copy of Jack VanDerhei’s written testimony for the House Ways & Means Committee is available online here.

Video of the testimony is available in two sections, Part 1 and Part 2.

Additional information regarding the Ways & Means hearing is available online here.

[ii]See page 11, online here.

[iii]Last year an EBRI Notes article (July 2011, online here) analyzed the potential impact of those kind of changes on retirement savings.

Titanic Proportions

This weekend marks the 100th anniversary of the sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner. Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden—and only—voyage, it carried 2,244 people, 1,514 of whom would perish as a result of a decision to carry only enough lifeboats to accommodate about half those on board. Despite that, the tale of Titanic’s closing hours is generally one of an orderly, “women and children first” evacuation, with the band playing on while passengers stood in line and waited their turn.

In an NPR report this week titled “Why Didn’t Passengers Panic on the Titanic?” David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that also sunk at about the same time. Both involved luxury liners, both had a similar number of passengers and a similar number of survivors. But on the Lusitania, passengers panicked—and the survivors were mostly those who were able to swim and get into the lifeboats. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.”

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the importance of starting to save early, establishing a plan, and having a goal all fit within the moral of that example: Act while you have time, as you may not always have all the time you need, or the resources to take advantage of it. But what kind of time do Americans have?
The concept of measuring retirement security—or retirement income adequacy—is an extremely important topic, and EBRI has been working with this type of measurement since the late 1990s. When we modeled the Baby Boomers and Gen Xers in 2012, approximately 44 percent of those households were projected to have inadequate retirement income for basic retirement expenses plus uninsured health care costs; so the glass is more than half full, but just a bit. That’s a big percentage, but it’s still an improvement of 5‐8 percentage points over what we found in 2003, when the glass was, indeed, half empty. The improvement occurred despite the impact of the 2008 financial crisis, and the subsequent “great recession.”

In part, that is because the passage of time allowed more funds to be saved, but that improvement is largely due to the fact that in 2003 very few 401(k) sponsors had automatic enrollment (AE) provisions in place, and participation rates among the lower-income workers (those most likely to be at risk) was quite low. However, with the uptick in adoption of AE the past few years after passage of the Pension Protection Act (PPA), participation rates have often increased to the high 80 or low 90 percent—and that stands to make a big difference in shoring up the retirement financial security of many of those who need it the most. In fact, EBRI simulation results show that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a plan design relying on voluntary enrollment, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent.

The tragic loss of life on the Titanic is generally attributed to a shortage of lifeboats, while on the Lusitania, it was the lack of time to get people into the lifeboats available. For many of those looking ahead to retirement, plan design changes such as automatic enrollment and contribution acceleration look to be a real retirement life-saver, as they encourage both early action and the effective use of time.

- Nevin E. Adams, JD


While the lack of retirement income adequacy for the lowest-income households is a matter of concern, so is the rate at which they will run “short” of money during retirement. Indeed, as documented in our July 2010 Issue Brief (“The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects,”41 percent of early boomers in the lowest income quartile could run short of money within 10 years after they retire.

More information is included in recent testimony by Jack VanDerhei, EBRI research director, before the Senate Banking Committee, on "Retirement (In)security: Examining the Retirement Savings Deficit" (T-171), available online here.

Planning Ahead

April is Financial Literacy Month, and National Retirement Planning Week, sponsored by the National Retirement Planning Coalition (of which EBRI’s America Savings Education Council (ASEC) is a member) is April 9–13. Both events serve to remind us all of the importance not only of saving, but of establishing specific goals for saving.

I was pleased, therefore, this past month to help one daughter set up her first SEP-IRA—and even more pleased to about the same time learn that my other daughter was, of her own volition, making a conscious effort to set aside what seemed to her father to be a fairly substantial portion of her modest income in savings. These are things I knew to do when I was their age, of course, but things I must admit took me a few years to act on.

It’s easy, in the normal press of life, to put off thinking about retirement, much less thinking about saving for a period of life many can hardly imagine. We all know we should do it—but some figure that it will take more time and energy than we can afford just now, some assume the process will provide a depressing, perhaps even insurmountable target, while others don’t even know how to get started (see Goals Tending).

Here are five reasons why you—or those you care about—should save for retirement now:

Because you don’t want to work forever.

If you want to stop working one day, you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t free.

Many people assume that expenses will go down in retirement—and, in fact, a recent EBRI Issue Brief ) noted “With the age 65 expenditure as a benchmark, household expenditure are lower by 19 percent by age 75, and 34 percent by age 85….” On the other hand, there are changes in how we spend in retirement as well—and they aren’t always less. That same EBRI report notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. “Health care expenses capture around 10 percent of the budget for those between 50–64, but increase to about 20 percent for those age 85 and over.” And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think:

Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that has more than tripled, to 37 percent. Those expectations notwithstanding, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure (see “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings”).

Because you don’t know how long you will live:

People are living longer and the longer your life, the longer your potential retirement, particularly if it begins sooner than you think. Retiring at age 65 today? A man would have a 50 percent chance of still being alive at age 81 (and a woman at age 85); a 25 percent chance of living to nearly 90; a 10 percent chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

What are you waiting for? A good place to start is the BallparkE$timate,® and with the other materials available at www.choosetosave.org

- Nevin E. Adams, JD


More information about National Retirement Planning Week is available online here.

Information about the Spring 2012 American Savings Education Council (ASEC) Partners Meeting, with a focus this year on retirement planning is available online here.

“Generation” Gaps

If you think it’s complicated trying to determine an individual’s retirement funding needs, imagine trying to do so for all American workers. That was the topic of a Senate Banking subcommittee hearing last week titled “Retirement (In)security: Examining the Retirement Savings Deficit,” at which EBRI Research Director Jack VanDerhei was asked to testify.(1)

When EBRI modeled the retirement savings gap of Baby Boomers and Gen Xers earlier this year, we found that between 43 and 44 percent of the households were projected to be at risk of not having adequate retirement income for BASIC retirement expenses plus uninsured health care costs—though that was 5–8 percentage points LOWER than what we found in 2003. That’s right: In terms of that retirement savings gap, American households are better off today than they were nine years ago—even after the financial and real estate market crises in 2008 and 2009.

Measuring retirement income adequacy is an extremely important and complex topic, and one that EBRI started to provide back as far as the late 1990s. Our recent projections indicate that the average individual deficit number (for those with a deficit) ranges from approximately $70,000 for families, to $95,000 for single males, to $105,000 for single females.

Stated in aggregate terms, that would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. That’s a large number, to be sure, but still considerably smaller than some of the projections that have been put forth.

Here are four things that are sometimes overlooked that help explain the “gaps” in retirement projection gaps:

Some won’t have a retirement

The reality is that some people won’t make it to retirement. On an individual level, we may not know who they are, but in the aggregate we can project the impact with some precision.

You can’t ignore the impact of uniquely post-retirement expenditures.

Health care costs—and post-retirement health care costs particularly—remain a potential source of underplanning, both for retirement and retirement projections. The reality is that we spend differently in retirement than we do before retirement. Moreover, the costs of care, and particularly care such as nursing home and/or long-term care, loom large. And many won’t think or insure for that risk until it’s too late.

Tomorrow’s retirement will be funded differently.

Looking back, even only a few years, assuming that the income sources of current retirees will be available to future retirees glosses over the reality that a major shift in emphasis in retirement plan design has taken place. In the future, the proportion of retirees receiving traditional pension income will almost certainly decline, and the percentage relying on defined contribution savings (primarily 401(k)-type plans) as a primary source of post-retirement income is certain to increase. Projecting future retirement income flows based on the experience of today’s retirees is certain to miss the mark.

We’re already saving “better.”

Thanks to the growing popularity of automatic plan design trends—automatic deferrals, contribution acceleration, qualified default investment alternatives—many of today’s retirement plan participants are already saving earlier and investing more age-appropriately than ever before. There’s no reason to assume these trends won’t continue to extend and expand going forward. Projections based on pre-Pension Protection Act defined contribution trends are relying on yesterday’s news.

- Nevin E. Adams, JD

(1) Video of the hearing is available online HERE. Dr. VanDerhei’s testimony is available HERE

“Counter” Intuitive?

When one considers the impact of changes in tax policy on retirement plan savings, it is perhaps natural to assume that those who pay more taxes would respond to changes in the taxation of their contributions and/or savings. However, what’s probably not as obvious to many is that lower-income workers could also be significantly impacted. Indeed, as noted in the March 2011 EBRI Notes, “…behavioral economics has shown that the reaction of employees in situations similar to this are often at odds with what would have been predicted by an objective concerned simply with optimizing a financial strategy.”(1)

As part of the 2011 Retirement Confidence Survey, workers were asked about the importance of tax deferrals in encouraging them to save for retirement. Quoting from the November 2011 EBRI Issue Brief, “If one were to look at this from a strictly financial perspective, one would assume that the lower-income individuals (those most likely to pay no or low marginal tax rates and therefore have a smaller financial incentive to deduct retirement savings contributions from taxable income) would be least likely to rate this as ‘very important.’ However, those in the lowest household income category ($15,000 to less than $25,000) actually have the largest percentage of respondents classifying the tax deductibility of contributions as very important (76.2 percent).”

Additionally, asked how they would likely respond if their ability to defer those taxes was eliminated, it was the lowest-income category ($15,000 to less than $25,000) that reacted most negatively—with 56.7 percent indicating they would reduce the amount they would save in these plans (see http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4785).

As part of the 2012 Retirement Confidence Survey,(2) participants were asked about their likely response to a different set of federal tax modifications included in a specific proposal. (3) Those participant responses were subsequently integrated with those of plan sponsor respondents to a 2011 AllianceBernstein survey(4) to the changes contemplated under that same proposal. The proposal author’s analysis had largely assumed status quo in terms of plan design changes (by plan sponsors) and contribution flows (by both individual participants and employers) in response to those changes.

In fact, the average percentage reduction for 401(k) participants in the two smallest plan size categories (less than $1 million and $1–$10 million in assets) were more than 1.5 times the value of the average percentage reduction for participants in any of the larger plan-size categories (regardless of the income level of the 401(k) participants). Striking as those results are, there is a ripple effect on participant savings to be considered as well.

A new EBRI study uses the EBRI-ERF Retirement Security Projection Model® (RSPM), and with a database of tens of thousands of 401(k) plans and millions of participant accounts, to provide baseline analysis. That analysis indicates that the cumulative impact of reported plan sponsor modifications and individual participant reactions would result in an average percentage reduction in 401(k) balances of between 6–22 percent at Social Security normal retirement age for workers currently ages 26–35. That analysis also indicates that an even larger average percentage accumulation reduction would result for participants in small plans.(5)

Those participant and plan sponsor responses may be counter-intuitive to some—but it’s the type of response - and impact - that shouldn’t be overlooked.

- Nevin E. Adams, JD

(1) See “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results from the 2011 Retirement Confidence Survey.”

(2) See “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings.”

(3) It’s not the first time EBRI has undertaken such an analysis, of course. EBRI has looked at preliminary evidence of the impact of these “20/20 caps” on projected retirement accumulations under a set of assumptions—see “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations”, and “Tax Reform Options: Promoting Retirement Security,” EBRI Issue Brief, No. 364, November 2011. EBRI also provided testimony before the Senate Finance Committee on the issue, online here. Research Director Jack VanDerhei also submitted testimony to the Senate Finance Committee on “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results From the 2011 Retirement Confidence Survey," .

(4) AllianceBernstein, 2011, “Inside the Minds of Plan Sponsors” Research.

(5) That integration of sentiment with EBRI’s extensive 401(k) database and modeling capabilities provided a unique perspective on the full potential impact of these changes on cumulative savings amounts, which was outlined in our recent March 2012 EBRI Notes article, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances.”

'Good' Vibrations

Last week the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., unveiled the 22nd annual Retirement Confidence Survey (RCS).

Among the things we have learned after doing this survey for more than two decades: People’s confidence about retirement frequently seems out of line with the financial resources they indicate they have on hand to fund it. Of course, most (56%) of this year’s respondents admit neither they nor their spouse have made even a single attempt to determine how much they need to achieve that comfortable retirement—so it shouldn’t be too surprising that, asked how much they think they need to have saved in order to provide for a comfortable retirement, many hold forth a number that seems lower than some might expect.

While we spent a fair amount of time this week discussing the results with reporters, one question that came up repeatedly was “Why do you do this survey? What do you hope people take from it?”

The survey itself is meaningful both for the kinds of issues it deals with: Questions that, as in this year’s RCS, deal not just with confidence as a “feeling” but also the criteria that underlie and influence that sentiment. It looks at the perspective both of those already in retirement, as well as those still working and heading toward that milestone. It also (with a perspective based on two decades of conducting this particular survey) offers insights on how those feelings and factors have changed over time.

Those good reasons notwithstanding, this past week EBRI reminded reporters that the RCS has found that people who have taken the time to do a retirement needs assessment are generally more confident than those who haven’t done so, and not necessarily because they find that they are in better shape than they’d thought. In fact, most report that they set higher savings goals AFTER they had done the assessment—and were THEN more confident in their situation.

That is why EBRI joined many others in 1995 to establish the American Savings Education Council (ASEC), and then the ChoosetoSave(r) program and the BallparkE$timate(r). Millions of Americans have used the BallparkE$timate(r) at www.choosetosave.org to help them climb the hill to savings and greater financial security, and according to the RCS, a more realistic view of the future.

There’s something to be said for knowing the size and extent of what was previously unknown, particularly when it comes to setting a financial goal as complex as planning for retirementcan seem.

If the annual publication of the RCS does no more than remind individuals of the importance of taking the time to do so, then it’s not only good information—it’s information that does some good.

- Nevin E. Adams, JD


Results of the 2012 Retirement Confidence Survey (RCS) are now available online HERE

"Managing" Expectations

On March 13,(1) the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., will unveil the 22nd annual Retirement Confidence Survey (RCS)—the longest-running annual retirement survey of its kind in the nation. Indeed, the RCS is unique in offering a perspective on retirement that is now as long as the retirement of those living to average life expectancy at 65.

Consider that back in 1996, the sixth annual RCS found that 24 percent of retirees were not confident that they would have enough money to live comfortably throughout their retirement years, and more than 1 in 5 said their lifestyles were worse than when they first retired (with nearly 1 in 10 calling them "a lot worse"). The report noted that “[t]wo-thirds of those working then predicted they would work after they ‘retire,’ and nearly 40 percent of those say they think they'll need to for financial reasons, to pay the bills and make ends meet.”

Five years later, the 2001 RCS noted that the percentage of individuals who say they have personally saved for retirement decreased from 75 percent in 2000 to 71 percent, though that was still better than the 59 percent cited in 1998. At the time, the RCS noted that the “changes in individual behavior regarding retirement savings may in part be attributed to recent declines in consumer confidence, employment, the economy, and the equity markets.”

While a press release about the 2006 RCS stated that “RCS data over the past 12 years continue to show that retirement confidence overall among workers does not seem to be affected by either stock market performance or varying economic conditions,” subsequent events—notably the 2008 financial crisis—did seem to undermine confidence levels.

The 2010 RCS acknowledged that Americans’ confidence in their ability to afford a comfortable retirement had plunged to a new low at the same time that the recent declines in other retirement confidence indicators appeared to be “stabilizing.” And yet, just one year later, the 2011 RCS cautioned, “Instead of making fundamental adjustments to their spending and saving patterns in response to the decline in confidence, workers continue to change their expectations ”.

How we view—and anticipate—retirement can have a dramatic impact on that reality, and the RCS provides valuable insights into the perspectives of those heading toward, and those already dealing with, the realities of retirement.

What matters, of course, isn’t one’s confidence about having a financially secure retirement. What matters is having taken the time and energy to actually do something about it.

Nevin E. Adams, JD


(1) Full results of the 2012 RCS will be available online at www.ebri.org the morning of Tuesday, March 13.

“Difference” Strokes

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or – as often as not these days – to work longer AND save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

However, the timing of the retirement decision is often not within an individual’s control. In fact, the Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned. In fact, nearly half (45 percent) of retirees reported that they were in this situation in 2011 (see EBRI Issue Brief No. 355, March 2011, The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting “the New Normal”).

Real-world data have shown (and shown for some time now) that the median retirement age for Americans is not even as old as 65 (it’s been 62). Still, EBRI research has shown that working longer – even working past the age of 65 – is no guarantee of a financially satisfying retirement. In fact, a June 2011 Issue Brief titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy” ) notes that, even if a worker delays his or her retirement until age 80, just 61.7% of the lowest preretirement income quartile households would have a 50 percent probability of not running out of money in retirement.

What Matters


The research notes that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and whether they save in a defined contribution retirement plan during their working lifetime. In fact, the report notes that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.” How much difference? At least a 10 percentage point difference in the majority of the retirement age/income combinations.

Ultimately, the research should remind us of a couple of things: first, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption. Second, and more important, even if that assumption pans out, it cannot be assumed that it will, in and of itself, prove to be sufficient.

But finally, and significantly, there is at least one thing individuals can exercise some control over in the “here and now” – their current—and continued—participation in defined contribution plans.

And that’s something that can directly—and significantly—make a difference in building a financially viable retirement.

- Nevin E. Adams, JD

(1) Admittedly, except for those in the lowest income quartile, this would be a small percentage of the population, depending on your expectations of success (see “Short” Comings ). Still, according to the EBRI Retirement Security Projection Model (RSPM) baseline results, the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success.

You can read more about how these factors impact retirement income adequacy HERE