Discussion of: How Automatic Enrollment Affects the

Discussion of: How Automatic Enrollment Affects the
Likelihood and Distribution of 401(k) Contributions:
Evidence from a National Survey
Retirement Research Consortium
August 7, 2014
Jack VanDerhei
EBRI Research Director
[email protected]
® Employee Benefit Research Institute 201
2014
1
Overview
•
What are you missing with a sample aged 55+?
•
•
What are you missing if you treat all AE plans the same?
•
•
•
Percentage of workers eligible for AE with a larger simulated employee
contribution under Voluntary Enrollment (VE), by tenure
What does it mean in the long run?
•
•
Default contribution rates
Auto escalation
What happens when you combine the increase in participation
rates under AE with the new behavior in employee
contributions?
•
•
Impact of automatic enrollment (AE) on participation rates by age
Percentage of Successful Simulated Retirements by Income Quartile: VE
vs. AE 401(k) Plans
Some potential data/methodological considerations
•
Time permitting
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2014
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Impact of plan design on participation rates by age
Sample limited to ages 55 to 69
90%
80%
70%
60%
50%
VE
AE
40%
30%
20%
10%
0%
<25
25-34
34-44
45-54
55-64
65+
Source: Stephen P. Utkus and Jean A. Young. “How America Saves
2014, A Report On Vanguard 2013 Defined Contribution Plan Data.”
® Employee Benefit Research Institute 201
2014
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Importance of AE plan design variables for employee contributions:
Ratio of median contributions for plans with 6 percent default and autoescalation vs. those with 3 percent default and no auto-escalation
By age
1.12
By age-specific salary quartiles
1.6
1.11
1.5
1.10
1.4
1.09
1.08
1.3
1.07
1.2
1.06
1.1
1.05
1.04
1
26-35 36-45 46-55 56-65
lowest second
third highest
Conditional upon participation
Limited to employees with 4 or less years of tenure and at least $10k in salary
Filters out plans that implemented AE between 1/2/2008 and 12/31/2011
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2014
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Percentage of workers eligible for AE with a larger
simulated employee contribution under VE, by tenure
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
0
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
Tenure
Source: Author’s simulations for WSJ, May 2011
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2014
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Percentage of Simulated Successful* Retirements by
Income Quartile: Voluntary Enrollment vs. Automatic
Enrollment 401(k) Plans
100%
VE
AE
85%
73%
75%
67%
59%
50%
Lowest income quartile
Highest income quartile
Source: VanDerhei (January 2014)
* "Success" is defined as achieving an X percent real replacement rate from Social Security and 401(k) accumulations combined as defined in VanDerhei
and Lucas (2010) where X = 80. The population simulated consists of workers currently ages 25–29 who will have more than 30 years of simulated eligibility
for participation in a 401(k) plan. Workers are assumed to retire at age 65 and all 401(k) balances are converted into a real annuity at an annuity purchase
price of 18.62.
Plans are assumed to have automatic escalation with a 1 percent of annual compensation increase and
plan-specific default contribution rates. Employees are assumed to retain their previous level of
contributions when they participate in a new plan and opt-out of automatic escalation in accordance with
the probabilities in VanDerhei (September 2007)
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2014
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Potential data/methodological considerations
• Only applies to those 55+
• 2008 and 2010 data does not allow one to observe the importance of
auto-escalation (primarily post-PPA)
• Definition of AE used in the study
•
•
Is it possible that this is picking up employees who started prior to the plan’s AE
implementation date?
Several industry surveys have continued to show that AE provisions are typically
NOT applied retroactively
• The disparity between AE participation rates (relative to VE) for this
study and those in industry and academic studies may suggest that
respondents are answering the AE question in the affirmative when
they shouldn’t
•
Is the “automatic enrollment” feature of DB a potential confusion here?
® Employee Benefit Research Institute 201
2014
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References
Utkus, Stephen P. and Jean A. Young. “How America Saves 2014, A
Report On Vanguard 2013 Defined Contribution Plan Data.”
VanDerhei, Jack (January 2014), The Role of Social Security, Defined
Benefits, and Private Retirement Accounts in the Face of the
Retirement Crisis, EBRI Notes
VanDerhei, Jack (October 2011), What Do You Call A Glass That Is 60–
85% Full? Pension Section News, Society of Actuaries.
VanDerhei, Jack (September 2007). The Expected Impact of Automatic
Escalation of 401(k) Contributions on Retirement Income EBRI
Notes.
VanDerhei, Jack and Lori Lucas (November 2010), The Impact of Autoenrollment and Automatic Contribution Escalation on Retirement
Income Adequacy, EBRI Issue Brief
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2014
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