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Retirement Savings Trends
Dallas L. Salisbury
President and CEO
Employee Benefit Research InstituteJune 11, 2012
1
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DC 1974 Pre ERISA, DOL and PBGC Age 24
2
EBRI Founding 1978 .34 Years andCounting at EBRI..Age 62
38 Years of Retirement Researchand Policy Analysis
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Annuity DBto LSD DB
to Hybrid LSD DBto LSD DC
Spend More on No Risk One Year Promise
+ Move Cost and Risk to Employee (inflation, investment, longevity)
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Relative importance of employer costs for employeecompensation, March 2012
4
___________________________________________________________________________________________________Compensation Civilian Private State and localcomponent workers industry government
___________________________________________________________________________________________________Wages and salaries 69.3% 70.4% 65.2%
Benefits 30.7 29.6 34.8Paid leave 7.0 6.9 7.3Supplemental pay 2.4 2.9 0.8Insurance 8.9 8.1 12.0Health benefits 8.5 7.7 11.6
Retirement and savings 4.6 3.6 8.5Defined benefit 2.8 1.5 7.7Defined contribution 1.8 2.1 0.8
Legally required 7.8 8.2 6.1___________________________________________________________________________________________________
_____________
The Employer Costs for Employee Compensation for June 2012 is scheduled to be
released onTuesday, September 11, 2012, at 10:00 a.m. (EDT).
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Distribution of Health Plan Enrollment for Covered
Workers, by Plan Type, 1988-2011
* Distribution is statistically different from the previous year shown (p
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Percentage of Private Sector Workers Participating in anEmployment-Based Retirement Plan by Plan Type, 1979-2009*
0%
5%
10%
15%
20%
25%
30%
35%
DB only
DC only
Both
8Source: DoL Form 5500 Summaries through 1998.*EBRI estimates 1999-2009
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Median Replacement Rates for 401(k) Accumulations* for Participants ReachingAge 65 Between 2030 and 2039 (percent of final five-year average salary)
50.7 54.059.5
67.2
27.724.723.223.2
1 2 3 4
Baseline Don't always have a 401(k)
27.5 30.834.7 39.4
Income Quartile at Age 65
Turnover With Non-Preservation Affect Results Dramatically
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Male Prime-Age (25-64) Workers Median TenureTrends, By Age, 1951-2010 (High Mobility)
3.52.7 2.7
4.5
7.6
6.06.7
7.36.5
6.15.5 5.3 5.2 5.2 5.3
7.6
11.4 11.511.8
10.1
9.4 9.5 9.6
8.1 8.28.5
9.3
13.0
14.5 14.615.3
14.5
13.4
10.511.2
10.2 10.29.8 9.5
10.1 10.4
3.22.82.93.02.82.72.82.8
3.2 3.2 3.1 3.1 3.0
5.1
7.0
5.0
6.9
8.8
11.0
12.8
9.1
11.2
14.7
0
2
4
6
8
10
12
14
16
18
1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010
Year
Yearso
fTenure
Ages 25-34Ages 35-44
Ages 45-54
Ages 55-64
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967,December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010) from theU.S. Department of Labor, Bureau of Labor Statistics.
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Female Prime-Age (25-64) Workers Median TenureTrends, by Age, 1951-2010 (High Mobility)
1.8 2.0 1.92.2
1.6
3.03.13.6 3.5 3.6 3.6
4.14.4 4.3 4.2
4.9
6.15.7 5.9 5.9
6.3
7.0 7.27.3
7.0 7.1
4.5
7.8
8.88.5
9.8 9.7 9.910.0
9.69.9
9.6 9.8 9.7
2.6
2.5 2.5 2.5
2.82.82.8 2.6 2.72.7
4.7
4.5
4.64.8
4.5 4.5
6.7
4.0
6.8 6.7
6.5 6.4
9.2
9.29.0
0
2
4
6
8
10
12
1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010
Year
Years
ofTenure
Ages 25-34
Ages 35-44
Ages 45-54
Ages 55-64
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967,December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, and 2010) fromthe U.S. Department of Labor, Bureau of Labor Statistics.
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Percentage of Those Age 65 or Older With PensionIncome, 1975-2010
25.0%
25.5%
27.3%
27.4%
30.3%31.5%
34.6%35.9%
37.7% 37.5%
35.6%
36.4%
35.0%
35.0% 35.3%
35.0%
35.5%
35.0%
34.0%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010
Source: EBRI tabulations of the 1976-2011 Current Population Survey.
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Percentage of Income Attributable to PensionIncome for Those Age 65 or Older, 1975-2010
14.4%
14.6%
14.8%
15.3%
15.8%
15.6%
16.9%
17.4%
19.0%
20.0%
18.8%
19.0%
18.5%
19.5% 19.8%
18.2%
18.7%
18.4%
18.4%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010
Source: EBRI tabulations of the 1976-2011 Current Population Survey.
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Provision of Retiree Health Benefits for Currentand All Future Retirees,Employers with 500+ Employees, 1993-2001
29%
23%
31%
46% 43% 41% 40% 38%36% 35%
24%28%30%
31%33%35%40%
40%
0%
10%
20%
30%
40%
50%
60%70%
80%
90%
100%
1993 1994 1995 1996 1997 1998 1999 2000 2001
Early Retirees Medicare-Eligible Retirees
Source: Mercer Human Resource Consulting.
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Percentage of Workers Expecting Retiree HealthBenefits, by Age and Retirement Experience, 1997-2010
15
45%
23%
33%
11%
43%
27%
33%
15%
36%
22%
27%
11%
32%
21%
28%
9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
45-64, never retired 65+, never retired 45-64, ever retired 65+, ever retired
1997 2002 2005 2010
Source: Employee Benefit Research Institute estimates based on data from the
Survey of Income and Program Participation, 1996, 2001, 2004, and 2008 panels.
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Retirement Income Sources of the Future
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Approximations Of Relative Benefits From DB and DCPlans Suggest That Both Can Be Valuable AdditionsTo Social Security Automatic Enrollment Is Of MajorValue For The Lowest Income Workers To Do Well
With DC Requires Automatic Enrollment
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110 1120 2130 3140
DC, Lowest 0% 0% 2% 9%DB, Lowest 2% 11% 28% 41%
DC, Highest 2% 18% 30% 47%
DB, Highest 3% 14% 28% 41%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Employees Currently Ages 2529:Median Replacement Rates from Voluntary Enrollment 401(k) vs.
Stylized Final Average Defined Benefit Plan (1.5%, High Three) as aFunction of Salary Quartile and Number of Years Eligible
Source: Source: EBRI/ERF Retirement Security Projection Model, versions 100205b4 and 120105b4.Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).
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110 1120 2130 3140
DC, Lowest0% 17% 34% 60%DB, Lowest 2% 11% 28% 41%
DC, Highest 4% 22% 41% 67%
DB, Highest 3% 14% 28% 41%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Employees Currently Ages 2529:Median Replacement Rates from Automatic Enrollment 401(k) vs.
Stylized Final Average Defined Benefit Plan (1.5%, High Three) as aFunction of Salary Quartile and Number of Years Eligible
Source: Source: EBRI/ERF Retirement Security Projection Model, versions 100205a4 and 120105a4Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).
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110 1120 2130 3140
DC, Lowest 0% 10% 22% 36%
DB, Lowest 2% 11% 28% 41%
DC, Highest 2% 14% 25% 38%
DB, Highest 3% 14% 28% 41%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Employees Currently Ages 2529:Median Replacement Rates from Automatic Enrollment 401(k) vs. Stylized Final
Average Defined Benefit Plan (1.5%, High Three) as a Function of SalaryQuartile and Number of Years Eligible: Alternative (Lower) Return Scenario
Source: Source: EBRI/ERF Retirement Security Projection Model, versions 100205a4 and 120105a4alt.Returns are based on a stochastic process with means of 4.45% Equity and 3.8% Fixed Income (nominal).
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110 1120 2130 3140
DC, Lowest 0% 0% 2% 9%
DB, Lowest 3% 9% 14% 23%
DC, Highest 2% 18% 30% 47%
DB, Highest 3% 9% 15% 24%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Employees Currently Ages 2529:Median Replacement Rates from Voluntary Enrollment 401(k) vs
Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as aFunction of Salary Quartile and Number of Years Eligible
Source: Source: EBRI/ERF Retirement Security Projection Model, versions 100205b4 and 120105b4cb.Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are based on astochastic process with a mean of 6.3% (nominal).
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110 1120 2130 3140
DC, Lowest 0% 17% 34% 60%
DB, Lowest 3% 9% 14% 23%
DC, Highest 4% 22% 41% 67%
DB, Highest 3% 9% 15% 24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Employees Currently Ages 2529:Median Replacement Rates from Automatic Enrollment 401(k) vs
Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as aFunction of Salary Quartile and Number of Years Eligible
Source: Source: EBRI/ERF Retirement Security Projection Model, versions 100205b4 and 120105b4.Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are
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Attitudes Are Getting More Realistic
Far More Savings Has BeenAnd Is - Needed
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Lowest 2 3 HighestIncome Quartile
No DB accruals
Lowest Quartile
2
3
Highest Quartile
Source: EBRI/ERF Retirement Security Projection Model version 110714e.* An individual or family is considered to be at risk in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate minimum retirementexpenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance and out-of-pockethealth-related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources inretirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balanceplans, annuities from defined benefit plans (unless the lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity or as alump-sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis
Income-specificDefined Benefit
PercentageAtRiskof
InadequateRetirement
Income
Impact of Income and Relative Value of Defined Benefit Accrualat Retirement Age on At-Risk* Probabilities
Percentage of population at risk for inadequate retirement income, by age-specific remainingcareer income quartiles and income-specific defined benefit value quartiles (baseline assumption)
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Early Boomers Late Boomers Gen Xers
EBRI 2003 RRR 51.7% 48.5% 51.7%
EBRI 2012 RRR 44.3% 43.3% 43.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
EBRI Retirement Readiness RatingTM (RRR): 2003 vs. 2012(Status Quo for Social Security, Housing Equity Used "As Needed")
Percentage of population at risk* for inadequate retirement income, by age cohort (baseline assumptions)
Sources: EBRI Retirement Security Projection Model versions 1501 and 1502.* See text for definition of "at risk"
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Early Boomers Late Boomers Gen Xers
Lowest income quartile 86.8% 83.6% 77.7%
2 48.0% 46.9% 45.8%3 29.3% 26.5% 29.3%
Highest income quartile 12.5% 11.2% 16.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Sources: EBRI Retirement Security Projection Model versions 1501 and 1502.* See text for definition of "at risk"
EBRI Retirement Readiness RatingTM (RRR): 2012(Status Quo for Social Security, Housing Equity Used "As Needed")
Percentage of population at risk* for inadequate retirement income, by age cohort and income quartile(baseline assumptions)
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60.7%
41.1%
30.6%
18.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
0 1-9 10-19 20+
Future years of 401(k) eligibility
Impact of future years of 401(k) eligibility on 2012 at risk* ratings for Gen Xers
*An individual is considered to be atrisk in this version of the model if their 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) and some health insurance andoutofpocket healthrelated expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid).The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAsand/or cash balance plans, annuities from defined benefit plans (unless the lump sum distribution scenario is chosen), and net housing equity ( in the form of a lumpsumdistribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis forreplacement rates, standardofliving and other thresholds.Source: EBRI Retirement Security Projection Model, Version 120201.
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12/31/2010 12/31/2011 estimated 3/31/2012 estimatedaverage $255,074.90 $272,680.81 $292,258.22
$230,000.00
$240,000.00
$250,000.00
$260,000.00
$270,000.00
$280,000.00
$290,000.00
$300,000.00
Average account balances for 401(k) participants 55-64 with atleast thirty years of tenure
Sources: 2010 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data CollectionProject; 2011 and 2012 Account Balances: EBRI estimates. The analysis is based on all participants with account
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Estimated percentage of consistent participants who have moremoney in their 401(k) accounts on 6/5/12 than at 10/9/07, by age andtenure
26-35 36-45 46-55 56-65
1-4 99.0% 98.6% 98.5% 98.0%
5-9 96.7% 96.2% 96.1% 95.0%
10-19 93.9% 91.0% 90.8% 89.3%
20-29 85.3% 85.0% 84.0%
30+ 85.4% 83.3%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
Sources: EBRI estimates based on EBRI/ICI ParticipantDirected Retirement Plan Data Collection Project.
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It Is Important To Look At Both DC and IRA Balances
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
25-34 35-44 45-54 55-64 65-74
Composition of combined 401(k) and IRA balances by age.Analysis limited to individuals with both 401(k) and IRA
balances at the end of 2008
non-rollover IRA
rollover
401(k)
111209c
Source: EBRI DC/IRA Database
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It Is Important To Look At Both DC and IRA BalancesWhen Considering Retirement Income Adequacy
This has led to a rush of products to provide
comprehensive planning using all assets and liabilities,the addition to managed accounts of lifetime incomepayout approaches, and the use of financial planners.
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Longevity Risk Reward
Probability of a Healthy 65-year-old Living to Various Ages
0
25%
50%
75%
100%
65 70 75 80 85 90 95 100 105
MaleFemale
At least onespouse
Age
Probability
85 88 92
50% chance
25% chance
92 94 97
Source: Annuity 2000 Mortality Tables.
The most significant risk that retirees face is longevity risk the risk of
outliving their assets. This risk is not hedged by traditional investment
strategies.
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Income Distribution of those age 65 and older in 2010 - $ toachieve 100% income replacement with annuity purchaseversus alternative income streams at noted deterministic
rate of return with 95% probability of success.Percentile Income SS % Not SS IMA.com $ 3%RR 7%WRR
10% $6,159 80% $1,231 18K 27K 17K
25% $10,757 92% $860 12.5K 19K 12K
50% $18,000 84% $2,880 42K 63K 40K75% $33,600 57% $14,448 210K 325K 199K
90% $61,357 30% $42,949 624K 965K 590K
95% $89,102 19% $72,172 1.05M 1.6M 1M
14.4 % had income of $50,000 or more.
IMA.com quotes on 9/13/2011 for female age 65 in GA not inflationindexed no guaranteed period no survivor benefit
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PAYABLE Monthly Benefit Levels as Percent of Career-
Average Earnings by Year of Retirement at age 62
0
10
20
30
40
50
60
70
1960 1980 2000 2020 2040 2060 2080
Low Earner ($19,388 in 2010; 25th percentile)
Medium Earner ($43,084 in 2010; 56th percentile)
High Earner ($68,934 in 2010; 81st percentile)
Max Earner ($106,800 in 2010; 100th percentile)
Source: 2010 OASDI Trustees Report
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0%
2%
4%
6%
8%
10%
12%
14%
16%
26-35 36-45 46-55 56-65
Average Percentage Reductions in 401(k) Account Balances atSocial Security NRA by Imposing 20/20 Limits in 2012,
by Age and Age-specific Salary Quartiles
Lowest
2
3
Highest
Source: EBRI Retirement Security Projection Model Version 110627c1.NB: this simulation only models the financial impact of the expected reduction in 401(k) contributions for employees who are not automatically enrolled byimposing the new limits and does not attempt to assess behavioral modifications on the part of either the plan sponsor nor the employees assumed to beeligible for participation in the plan. The simulated rates of return are the same as in VanDerhei and Copeland (July 2010). This version of the analysis assumesno job turnover, withdrawals or loan defaults. The full stochastic nature of the model will be included in future analysis.
Age
Salary
9.8% 15.1%
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Lowest income quartile 2 3 Highest income quartile
500M 23.5% 12.2% 6.8% 13.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Average PercentageReductions in 401(k)Account Balances at
Social Security NormalRetirement Age
Source: Author's calculations based on results from EBRI Retirement Security Projection Model Version 1472, and responses to AllianceBernstein (2011) andEmployee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2012 Retirement Confidence Survey.Note: This simulation models only the financial impact of the expected reduction in 401(k) account balances for employees who are not automatically enrolled bymodifying the behavior of plan sponsors and participants and does not attempt to assess behavioral modifications on the part of eligible nonparticipants. Thesimulated rates of return are the same as in VanDerhei and Copeland (July 2010). This version of the analysis assumes no job turnover, withdrawals or loandefaults. The full stochastic nature of the model will be included in a future analysis. Plan sponsor and participant reactions to the proposal are explained in thetext. Employer increases or decreases to contributions are represented by the midpoint of the range denoted on the AllianceBernstein survey.
Simulated Impact of Proposal to Modify the Federal Tax Treatment of Employer and Employee Contributions for 401(k)Plans In Exchange for an 18 Percent Match from the Federal Government for Employees Currently 26 35, by Plan Size
and Age specific Salary Quartiles: Midpoint Estimates
For more detail, see VanDerhei (March 2012)
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