BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov
KAREN E. SMITH, Urban Institute
Email: ksmith@ui.urban.org
ERIC J. TODER, National Bureau of Economic Research (NBER)

The long-term shift in coverage from defined benefit (DB) pensions to defined contribution (DC) plans may accelerate rapidly as more large companies freeze their DB pensions and replace them with new or enhanced DC plans. This paper uses the Model of Income in the Near Term to simulate the impact of an accelerated transition from DB to DC pensions on the distribution of retirement income among boomers. A scenario in which employers freeze all remaining private sector DB plans and a third of all state and local plans over the next five years will on balance produce more losers than winners among boomers and reduce their average incomes at age 67. Income changes will be largest among higher-income boomers, who have the highest DB coverage rates and projected pension incomes. Furthermore, the numbers of winners and losers and net income changes are much greater for the last wave of boomers (born between 1961 and 1965) than for earlier boomers. Younger boomers are most likely to have their DB pensions frozen with relatively little job tenure and to lose their high accrual years for DB pension wealth, but also to have relatively more years to accumulate DC pension wealth before retirement.

JANICE KAY MCCLENDON, Stetson University College of Law
Email: jmcclend@law.stetson.edu

In August of 2006, President Bush signed into law the most sweeping reform of America’s pension laws in over 30 years. Touted as the cure-all to pension funding ills and Enron-type scandals, the Pension Protection Act of 2006 (“Act”) is designed to strengthen defined benefit plans and the federal corporation that backs the benefits under those plans by increasing funding requirements and employer deductibility limitations. The Act also includes provisions designed to strengthen defined contribution plans, such as 401(k) plans.

Although well-intended, the Act will do little to slow down employers’ mass exodus from the defined benefit plan system. Over the past 20 years, both struggling and healthy companies have abandoned defined benefit plan sponsorship. In 2005 and 2006 alone, United Airways, US Airways, IBM and Verizon were among the companies that either terminated their defined benefit plans or froze plan benefit accruals. General Motors, America’s largest defined benefit plan sponsor, is now facing a financial crisis that may affect its 600,000 plan participants. With its more burdensome and costly requirements, the Act will hasten the death knell of traditional defined benefit plans as more employers face mounting and uncertain liabilities under these plans. Further, the Act does little to promote retirement security for defined contribution plans. Increasingly more common, employers are abandoning defined benefit plan sponsorship in favor of defined contribution plans. These plans provide little in the way of retirement security. Over the last five years, thousands of employees have invested plan assets in employer securities. With the downfall of companies such as Enron, WorldCom, and the poor performance of other companies such as Lucent Technologies and Qwest Communications, these employees have lost a large part of their retirement savings. Other employees have pilfered their retirement savings by consuming their account balances in pre-retirement years through in-service distributions, plan loans, hardship distributions and distributions on termination of employment. While the Act encourages employer-facilitated investment advice and promotes some level of plan asset diversification, it does little to ensure that plan participants will accrue significant benefits for post-retirement years.

This Article looks at America’s loss of retirement security stemming from the shift away from traditional defined benefit plan sponsorship and the embracement of defined contribution plan sponsorship. It also looks at the root causes underlying the shift and how the Act fails to adequately address the looming pension crisis. Finally, the Article, recommends additional legislative changes that increase the retirement security provided under employer-sponsored defined contribution plans.

DALLAS L. SALISBURY, Employee Benefit Research Institute (EBRI)
Email: SALISBURY@EBRI.ORG
ELISABETH BUSER, Employee Benefit Research Institute (EBRI)
Email: buser@ebri.org

This paper presents a review by the Employee Benefit Research Institute of 251 401(k) plan sponsors that have suspended matching contributions for their approximately 4.4 million workers. The review found that those employing 50 percent of the workers also maintained an open defined benefit plan. An additional 16 percent of workers were with employers that were still obligated to fund a frozen defined benefit plan. Further, 8 percent of the workers were with an employer that had both an open and a frozen defined benefit plan that carried funding obligations. Because of the current economic conditions, many of these employers must make what are unexpected contributions to the defined benefit plan as a result of asset losses and liability growth, but they can eliminate what are discretionary matching contributions to a 401(k)-type plan. For the 50 percent of the workers in this group of 251 employers, the 401(k)-type retirement plan is an additional benefit to the open defined benefit pension plan; thus, retirement benefits are still being provided by the employer, in spite of the suspended 401(k) matching contribution. Having detailed information on these firms would allow for a more detailed analysis and firmer findings, but the information gleaned from what is available suggests that most 401(k)-type matching contribution suspensions for this group of companies are taking place at employers that also have other retirement plan obligations, specifically for a defined benefit pension. It must be noted that it is not known how many out of the universe beyond this group of 251 employers have suspended matching contributions, covering how many additional workers.

The PDF for the above title, published in the June 2009 issue of EBRI Notes, also contains the fulltext of another June 2009 EBRI Notes article abstracted on SSRN: “Savings Needed for Health Expenses in Retirement: An Examination of Persons Ages 55 and 65 in 2009.”

YOUNGKYUN PARK, Employee Benefit Research Institute (EBRI)
Email: park@ebri.org

During the recent financial crisis, public-sector pension plans have seen large declines in the value of their investment portfolios. This has affected entities from school districts, to local governments, to state governments. Among the most deeply affected in dollar terms was the California Public Employees' Retirement System (CalPERS), whose pension fund value declined more than $81 billion in 2008, down 31 percent. The declines in the value of pension assets have brought attention to several issues, such as funding status, the rates of return used to discount plan liabilities (known as the "discount rate"), and investment strategies. And, given public-sector plan sponsors' limited ability to increase worker contributions, increasing deficits in pension plans has raised the probability that higher-than-expected employer contributions will have to be made to make up for the larger-than-previously-projected shortfall, if any. Not surprisingly, many public plan sponsors are considering how to stabilize their contributions to the plans.

This paper reviews actual public pension plan contribution behavior from 2001 to 2006, pension asset allocations from 2003 to 2007, and the effect that investment performance has on employer contribution volatility. This analysis examines the volatility in employer contribution rates caused by the higher-return-seeking/higher-risk investment portfolios adopted by many pension plans, and whether plan sponsors will increase fixed-income investments in order to reduce volatility. It appears that, in the short run, a significant shift toward a lower-return investment policy in exchange for reduced volatility in employer contributions is unlikely to occur because of plans sponsors' expected high returns from current asset allocations based upon historical rates of return, their ability to use the assumed investment rate of return as the discount rate in calculating liabilities, and the understandable tendency of investment managers to not deviate from peer group investments, as fiduciary standards stress acting like other 'prudent experts' would in like circumstances.

PABLO ANTOLIN, Organisation for Economic Cooperation and Development, OECD
Email: PABLO.ANTOLIN@OECD.ORG
EDWARD WHITEHOUSE, Organization for Economic Co-Operation and Development (OECD)
Email: edwardcube@aol.com

The current generation of workers can expect lower pension benefits in retirement than the current generation of pensioners. Private, voluntary pension savings will therefore play a greater role in providing for old age. This paper calculates the size of the "pension gap": the difference between the benefits from mandatory retirement-income provision and a target pension level. It then computes the amount that people would need to save to achieve the target.

Data on coverage of private, voluntary pension schemes in a range of OECD countries are then presented. The paper also shows how coverage varies with age and earnings. The results show significant gaps in coverage, particularly among low earners and younger workers. The effect could be a resurgence of old-age poverty when these generations reach retirement. Data on contributions to private pensions show that these are, on average, at a level likely to fill the pension gap. Expanding coverage rather than raising contribution rates should therefore be the policy priority.

Five policy options for increasing coverage are assessed: (i) mandating private pensions; (ii) "soft compulsion", which is automatic enrollment in private pensions but with an opt-out; (iii) facilitating access to the means for saving for retirement; (iv) preferential tax treatment of retirement savings; and (v) improving financial awareness.

JINGJING CHAI, Goethe University Frankfurt - Department of Finance
Email: chai@finance.uni-frankfurt.de
WOLFRAM J. HORNEFF, Goethe University Frankfurt - Department of Finance
Email: horneff@finance.uni-frankfurt.de
RAIMOND MAURER, University of Frankfurt - Faculty of Business and Economics
Email: Rmaurer@wiwi.uni-frankfurt.de
OLIVIA S. MITCHELL, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER)
Email: mitchelo@wharton.upenn.edu

This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, if we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science
Email: vanderhei@ebri.org
SARAH HOLDEN, Investment Company Institute
Email: sholden@ici.org
LUIS ALONSO, Employee Benefit Research Institute (EBRI)
Email: alonso@ebri.org

The annual Employee Benefit Research Institute/Investment Company Institute (EBRI/ICI) 401(k) database update report is based on large cross-sections of 401(k) plan participants. Whereas the cross-sections cover participants with a wide range of participation experience in 401(k) plans, meaningful analysis of the potential for 401(k) participants to accumulate retirement assets over time must examine how a consistent group of participants’ accounts have performed over the long term. This paper presents recently available longitudinal data from the EBRI/ICI 401(k) database on consistent participation in a 401(k) plan, through year-end 2007. Looking at consistent participants in the EBRI/ICI 401(k) database over the eight-year period from 1999 to 2007, the average 401(k) account balance increased at an annual growth rate of 9.5 percent over the period, to $137,430 at year-end 2007. The median 401(k) account balance (half above, half below) increased at an annual growth rate of 15.2 percent over the period, to $76,946 at year-end 2007. Data for 2008 are currently being analyzed and are expected to be published later this year. At year-end 2007, the average account balance among consistent participants was double the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was more than four times larger than the median balance across all participants at year-end 2007. The asset allocation of the 2.4 million 401(k) participants in the consistent group was broadly similar to the asset allocation of the 21.8 million participants in the entire year-end 2007 EBRI/ICI 401(k) database. On average, about two-thirds of 401(k) participants’ assets were invested in equities, through equity funds, the equity portion of balanced funds, and company stock. The data in this report extend only to year-end 2007; the EBRI/ICI data for year-end 2008 are not available at this time, so the sharp market downturn of 2008 is not reflected in this report. Those data are currently being analyzed and are expected to be published later this year.

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper examines workers’ decisions to take a lump-sum distribution - a one-time payment - from an employment-based retirement plan when changing jobs, while remaining in the labor force. It builds on earlier, top-line data from the 2004 Survey of Income and Program Participation (SIPP). This study provides estimates of the percentage of workers changing jobs and leaving their assets in their former employers’ plan, compares the standard of living of individuals age 55 or older with that of their early 50s, and assesses how the current near-elderly and elderly have fared after making a lump-sum decision. As of 2006, 16.2 million workers had taken a lump-sum distribution of their retirement plan assets. The average amount of these distributions was $32,219 and the median (mid-point) amount was $10,000. Almost half of these distributions were for less than $10,000, and 22.7 percent were received from 2004 through 2006. Just over 55 percent went to individuals age 40 or younger, 83.7 percent were received by whites, and 53.9 percent went to females. Recipients ages 61-64 had the highest average amount of any age category, and the average distribution was significantly higher for males than for females. Through 2006, almost half (47.3 percent) of those taking a lump-sum distribution used at least some portion of the money for tax-qualified savings, while 16.9 percent used at least some portion of it for consumption. The other most prevalent uses were buying a home, paying off debt, or starting a business. At least some portion of a lump-sum distribution is more likely to go for tax-qualified savings if the distribution is larger, the recipient is older, male or white.