Discussion of: Who is Easier to Nudge?
Retirement Research Consortium
August 7, 2015
Jack VanDerhei
EBRI Research Director
vanderhei@ebri.org
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2015
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Alternative or complementary views of the issue
• Are low income employees less likely to opt out of defaults?
•
•
Less likely to increase contribution rates (from the default) but would appear more
likely to decrease them
Results depend on default contribution rates
• 3 vs. 6 percent defaults for automatic enrollment
• Impact of a Proposed Stretch-Match with Auto Escalation and a 6%
default
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2015
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Distribution of Employee Contribution Rates Relative to the Default by Default Rate
and Years of Tenure for Automatic Enrollment Plans Without Escalation
(where 2013 assets > $0 and 2013 tenure < [2013 – plan implementation date])
3 percent default
6 percent default
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
greater than
40%
equal to
50%
40%
less than
30%
30%
20%
20%
10%
10%
1
2
3
4
5
Tenure
6
7
low
high
low
high
low
high
low
high
low
high
low
high
low
high
high
low
0%
8
0%
high low high low high low high low high low
1
2
3
Tenure
4
5
Low: $10,000 < Salary < $30,000; high: Salary > $30,000
NB: based on cross-sectional 2013 data (not time-series)
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3 vs. 6 percent defaults for automatic enrollment*
• Under a set of specified behavioral assumptions, more than a quarter
of those in the lowest-income quartile who had previously NOT been
“successful” under actual default contribution rates were found to be
successful as a result of the change in deferral percentage.
•
Baseline threshold = 80 percent of pre-retirement income replaced by Social
Security plus inflation-adjusted annuity of 401(k) + IRA rollovers (at 65)
• 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 now ARE successful as a result of the change in deferral
rate was 18.4 percent.
*Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans:
The Impact on Retirement Savings Success in Plans With Automatic
Escalation, EBRI Notes, September 2012
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2015
Impact of a Proposed Stretch-Match on Current 401(k)
Participants
• Measuring the impact of a proposed alternative to the PPA safe harbor:
•
•
•
Default at 6 percent
Auto increase of 2 percent per year until 10 percent
Employer match of:
• 50 percent on the first 2 percent, and
• 30 percent on the next 8 percent
• How to model something that does not exist (yet)?
•
•
Starts with the same technique developed for VE 401(k) plans
• Looks at the incentives provided for each 1 percent of compensation
• e.g., able to differentiate between employee behavior for a 50 percent
match on the first 6 percent vs. 100 percent match on the first 3 percent
Expands to isolate and simultaneously predict joint influence of:
• Default contribution rates
• Auto increase (yearly interval and maximum limits)
• Level of employer match rates at each 1 percent of compensation
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2015
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Percentage increase in 401(k) accumulations* at age 65 from FUTURE
employee contributions by age and income quartile if proposed
stretch-match safe harbor was used instead of the PPA safe harbor
(assumes employees revert back to default on job change)
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Lowest income quartile
Second income quartile
Third income quartile
Highest income quartile
25-29
16.5%
18.1%
19.0%
18.6%
30-34
16.8%
18.7%
20.0%
18.0%
35-39
17.2%
20.4%
20.2%
16.4%
40-44
16.3%
20.4%
19.6%
14.7%
45-49
15.5%
20.2%
18.0%
15.6%
50-54
16.5%
18.6%
17.7%
14.7%
55-59
14.0%
17.6%
19.2%
17.3%
Source: Employee Benefit Research Institute Retirement Security Projection Model® Versions
2262 and 2263.
* This includes 401(k) balances as well as IRA balances rolled over from 401(k) plans.
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2015
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Employer Match as a Function of Employee Contribution
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
PPA safe harbor
Proposed stretch match
proposal
0.5%
0.0%
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2015
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Percentage increase in 401(k) accumulations* at age 65 from
FUTURE employee and employer contributions by age and income
quartile if proposed stretch-match safe harbor was used instead of
the PPA safe harbor
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Lowest income quartile
Second income quartile
Third income quartile
Highest income quartile
25-29
2.6%
3.5%
5.5%
6.3%
30-34
3.0%
6.5%
6.6%
6.6%
35-39
3.7%
8.1%
8.2%
6.6%
40-44
2.8%
7.9%
8.3%
5.0%
45-49
2.6%
7.5%
7.3%
5.5%
50-54
2.9%
6.4%
7.4%
3.7%
55-59
3.4%
6.3%
7.1%
6.1%
Source: Employee Benefit Research Institute Retirement Security Projection Model® Versions
2262a and 2263a.
* This includes 401(k) balances as well as IRA balances rolled over from 401(k) plans.
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2015
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