Data & Research December 24, 2008

Companies Move toward Faster Eligibility for Retirement Plans

Profit Sharing/401k Council of America (PSCA) research shows a dramatic change over time to employee eligibility requirements for company-sponsored retirement plans.
Reported by

PSCA noted that in 1998, when it first began collecting defined contribution plan eligibility data, only 24% of employers allowed employees to begin contributing to their 401(k) plans immediately upon employment. This percentage has more than doubled to 55.1% of all employers in the fall of 2008.

The percentage is even greater among employers with 1,000 or more employees (70.5%).

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Employees are eligible to participate within the first three months of employment at 72.7% of companies and at 87.2% of large companies (1,000 or more employees), PSCA said. Only 14.7% of all plans have a one-year or longer service requirement prior to eligibility.

For matching company contributions, 38% of all employers allow immediate eligibility for employees, while 8.7% have a three-month service requirement, and 9.9% have a six-month service requirement for eligibility. A little more than 29% of employers have a one-year service requirement for employees to be eligible for company matching contributions.

As for age requirements, 42.8% of companies have no minimum age mandate for eligibility for participant deferrals. Just over 40% have no minimum age requirement for employees to be eligible for matching contributions.

Stricter Eligibility for Non-Matching Company Contributions

PSCA’s research also indicated a trend away from longer service requirements for employees to be eligible for non-matching company contributions to retirement plans; however, in 2008, 49.3% of companies still required one year or more of service.

Nearly 22% of all companies allowed for employees to be immediately eligible for company match upon employment, but among the largest employers (1,000 or more employees) almost 65% provide for immediate eligibility.

As for age requirements, 42.7% of companies had no minimum age requirement for eligibility for non-matching employer contributions, while 21.9% had a minimum age requirement of 18, and 34.7% required employees to be 21 to be eligible.

PSCA collected defined contribution plan eligibility data from 531 companies, 97.7% of which permit employee contributions to an employer-sponsored defined contribution plan, 78.5% offer employer matches, and 54.9% make non-matching company contributions.

The PSCA report is here.

Data & Research December 24, 2008

Joint Life Expectancy: A Better Methodology for Retirement Distribution?

While past research has often focused on a fixed distribution period for retirement income, using a joint life expectancy might better address the primary goal of retirees to provide income for life.
Reported by

In a paper for the Journal of Financial Planning, co-authors David and Brian Blanchett (yes, they’re brothers) explained how joint life expectancy can be used during the retirement distribution period.

One finding of the research is that using a joint life expectancy results in a 1% to 2% higher withdrawal rate for the same probability of failure than one based on a fixed period. “Therefore, the sustainable real withdrawal rate available based on a fixed time period is likely an overly conservative estimate for most retirees,’ according to the report.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

David Blanchett, a full-time MBA student at the University Chicago and who also works for Unified Trust Company, said he has used fixed distribution periods for most of his research; however he sees one problem with using fixed periods when it comes to creating income for life. He explained to PLANADVISER.com that a fixed distribution period doesn’t take into account someone dying during that distribution period; it doesn’t address the actual life expectancy of an individual or a couple.

“There’s nothing wrong with the fixed-rate approach, but this is kind of a more pure methodology, because this is answering the question we are trying to more or less answer in our research and for our clients: What amount of income can I take from a portfolio to create lifetime income?,’ Blanchett said.

While there’s no product behind the research, Blanchett noted that there are implications for companies to develop a product that does this, as it’s a complicated process for advisers to do on their own. Most products Blanchett is aware of allow you to do dynamic things around a fixed period, and do not take consider the likelihood of living to each age at each point in time. Further, most products are developed just for one person and not a couple.

“It’s just one part of the growing body of distribution research,’ Blanchett added. It should be considered along with other things in the retirement distribution phase, such as sequence risk, the impact of changing mortality, and the impact of dynamic changes to a distribution portfolio. “This is just one of those things to be considered when picking that final withdrawal figure for a client,’ he said.

You can listen to an interview with Blanchett here (click the link to download the audio file).


«