EBRI Shares Factors That Impact Retirement Readiness

The Employee Benefit Research Institute (EBRI) has answered questions posed in a recent Senate committee hearing about retirement savings.

At a hearing before the U.S. Senate Committee on Health, Education, Labor and Pensions (HELP), witnesses shared the initiatives that are working and need to continue or grow to help workers save for retirement (see “Retirement Savings Hearing Witnesses Share What Works”). In testimony submitted for the record following the hearing, EBRI Research Director Jack VanDerhei listed factors that impact the retirement readiness of Americans.   

Availability of Defined Benefit Plans    

As it has previously, EBRI noted the importance of defined benefit (DB) plans in achieving retirement income adequacy for Baby Boomers and members of Generation X. Overall, the presence of a defined benefit accrual at age 65 reduces the “at-risk” percentage by 11.6 percentage points, according to EBRI research. The defined benefit plan advantage (as measured by the gap between the two at-risk percentages) is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class (the reduction in the at-risk percentage for the second and third income quartiles combined is 9.7 percentage points).   

Future Eligibility for a Defined Contribution Plan    

EBRI research has previously documented (see “Gen X Advantage”) that the number of future years that workers are eligible to participate in a defined contribution (DC) plan has a tremendous impact on their at-risk ratings. Specifically, Gen Xers with no future years of DC plan eligibility would run short of money in retirement 60.7% of the time, whereas fewer than one in five (18.2%) of those with 20 or more years of future eligibility are simulated to run short of money in retirement. 

Amount of Default Deferral Rates

VanDerhei noted a plan design feature often suggested as a way to improve retirement income adequacy in 401(k) plans with automatic enrollment is to increase the initial default deferral rate from its current value (typically 3% of participant compensation) to 6% of compensation. EBRI modeled the impact of making that change and found that in 2012 more than one-quarter of those in the lowest-income quartile who had previously not been successful under actual plan default contribution rates would attain retirement income adequacy as a result of raising the auto-deferral to 6% (see “Higher Starting Deferral Rate Improves Savings Success”).    

When employees in the highest-income quartile were analyzed under the same set of assumptions, the percentage of those who had not previously been successful (under the actual default contribution rates) that would become successful as a result of the higher deferral rate was 18.4%.      

Job Changes and Default Deferral Restarts

EBRI research has previously documented the influence of plan design variables, as well as employee behavior in auto-enrollment 401(k) plans. Large differences in the probability of having at least 80% of preretirement income replaced—when 401(k) balances and individual retirement account (IRA) rollovers from 401(k) plans at job change are combined with Social Security benefits—were found, depending on which plan design factors and employee behavior assumptions are used.For example, if one assumes that an automatic enrollment plan has a feature that automatically escalates a worker’s 401(k) contribution by 1% of compensation annually and caps employee contributions at 15% of compensation, the employee’s success rates can vary from 62% to 77%, depending on whether employees are assumed to opt out of the automatic escalation and whether they are assumed to remember/retain their previous level of contributions when they change jobs versus reverting back to the plan’s initial default.      

Regarding turnover rates, VanDerhei said the most recent U.S. Census Bureau data show the overall median tenure of workers—the midpoint of wage and salary workers’ length of employment in their current jobs—was 5.4 years in 2012, compared with 5.0 years in 1983.VanDerhei explained that the data about employee tenure—the amount of time an individual has been with his or her current employer—show that career jobs never existed for most workers and have continued not to exist for most workers. This indicates that, historically, most workers have repeatedly changed jobs during their working careers, and all evidence suggests that they will continue to do so in the future.     

Retirement Savings Account Leakage

If “success” is defined as achieving an 80% real replacement rate from Social Security and 401(k) accumulations combined, then workers ages 25 to 29 in the lowest-income quartile (who will have more than 30 years of simulated eligibility for participation in an automatic enrollment 401(k) plan), will only experience a 6.1 percentage point decrease in success resulting from the combination of cashouts, hardship withdrawals and loans, according to EBRI research. When you add in the impact of loan defaults the decrease in success is 7.1 percentage points.   

The complete EBRI testimony is at http://www.ebri.org/pdf/publications/testimony/T-174.pdf.