How Much Would it Take? Achieving Retirement Income
Equivalency between Final-Average-Pay Defined Benefit
Plan Accruals and Voluntary Enrollment 401(k) Plans in the
Private Sector
Jack VanDerhei
Research Director
Employee Benefit Research Institute
vanderhei@ebri.org
THE Q-GROUP SPRING 2014 SEMINAR
April 9, 2014
® Employee Benefit Research Institute 201
2014
1
Background
• Previous research
•
•
•
Samwick and Skinner (2004)
Poterba, Rauh, Venti and Wise (2007)
EBRI 401(k) simulations (2002-2013)
• Reality Checks: A Comparative Analysis of Future Benefits from
Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, FinalAverage-Pay Defined Benefit and Cash Balance Plans (June 2013
EBRI Issue Brief)
•
•
•
Rationale
Baseline assumptions
Sensitivity analysis
• December 2013 EBRI Notes article
•
Replace median defined benefit generosity with a procedure to determine the
generosity parameter needed to produce equivalent retirement income
® Employee Benefit Research Institute 201
2014
2
Baseline Assumptions
• Historical rates of return
•
Stochastic variables with log normal distribution and mean arithmetic real returns
of 8.6 percent for equities, 2.6 percent for bonds
• Fees of 0.78 percent
• Wage growth 3.9 percent until 55 and 2.8 percent thereafter
• Participation probability = (1+unconditional probability)/2 once they
have participated
•
Unconditional probability before they have participated the first time
• Cashouts for 401(k) follow Vanguard 2012 experience
• Cashouts for defined benefit terminated vested based assumption
that participants react similar to 401(k) participants based on LSD
amount
• Annuity purchase price at 65 for males = 12.34
® Employee Benefit Research Institute 201
2014
3
Sensitivity Analysis
1. Reducing rates of return by 200 basis points.
2. Increasing annuity purchase prices to reflect low bond yields at the
time.
3. 1 and 2 simultaneously
4. Assuming real-wage growth does not drop to zero after age 55.
5. Assuming conditional-participation rates do not increase once an
employee has participated in a 401(k) plan.
6. Assuming no cashouts at job change.
7. Changing defined benefit generosity parameter from median to 75th
percentile
® Employee Benefit Research Institute 201
2014
4
® Employee Benefit Research Institute 2014
5
® Employee Benefit Research Institute 2014
6
® Employee Benefit Research Institute 2014
7
® Employee Benefit Research Institute 2014
8
® Employee Benefit Research Institute 2014
9
® Employee Benefit Research Institute 2014
10
® Employee Benefit Research Institute 2014
11
® Employee Benefit Research Institute 2014
12
® Employee Benefit Research Institute 2014
13
® Employee Benefit Research Institute 2014
14
® Employee Benefit Research Institute 2014
15
® Employee Benefit Research Institute 2014
16
® Employee Benefit Research Institute 2014
17
® Employee Benefit Research Institute 2014
18
® Employee Benefit Research Institute 2014
19
® Employee Benefit Research Institute 2014
20
® Employee Benefit Research Institute 2014
21
Future Research
•
Since the passage of the Pension Protection Act (PPA) in 2006, several
EBRI studies have focused on the likely impact of automatic enrollment (AE)
on 401(k) participants.
•
•
•
While most industry data shows that the number of recently hired workers eligible for
participation in an AE 401(k) plan has been increasing steadily since 2007, there are still a
number of assumptions with respect to opt-out behavior for plans with automatic escalation of
contributions that need to wait for additional empirical data before parameterization of the
models can take place with increased precision.
Therefore, despite the upward trend in AE adoption, voluntary enrollment
(VE) 401(k) plans were the only type of 401(k) plan modeled in this analysis.
Future research will repeat the analysis for AE plans as soon as there is
sufficient time-series information and a corresponding analysis of median DB
accrual rates required for equivalent retirement income will be undertaken.
® Employee Benefit Research Institute 201
2014
22
APPENDIX -- Cash balance plans
® Employee Benefit Research Institute 201
2014
23
® Employee Benefit Research Institute 2014
24
® Employee Benefit Research Institute 2014
25
References
Poterba, James, Joshua Rauh, Steven Venti, and David A. Wise.
“Defined Contribution Plans, Defined Benefit Plans, and the
Accumulation of Retirement Wealth.” Journal of Public Economics
91, no. 10 (November 2007): 2062–2086.
Samwick, Andrew A., and Jonathan Skinner. “How Will 401(k) Pension
Plans Affect Retirement Income?” The American Economic Review
94, no. 1 (March 2004): 329–343.
® Employee Benefit Research Institute 201
2014
26