"Will Automatic Enrollment Reduce Employer Contributions to 401(K) Plans?" 

MAURICIO SOTO, International Monetary Fund (IMF)
Email: mauricio.soto.1@bc.edu
BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org

Many employers match employee contributions to 401(k) plans. However, the employer cost of continuing this practice may increase rapidly as trends towards automatic enrollment boost employee participation. This paper examines the relationship between employer matching behavior and automatic enrollment. Using a sample of large 401(k) plans, we find that match rates are about 7 percentage points lower among firms with automatic enrollment than among those without automatic enrollment, even controlling for firm characteristics. So while auto-enrollment increases the number of workers participating in private pensions, our findings suggest it might also reduce the level of pension contributions.

"An Update on 401(K) Plans: Insights from the 2007 Survey of Consumer Finance" 

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
Email: MUNNELL@BC.EDU
RICHARD W. KOPCKE, Federal Reserve Bank of Boston
Email: richard.kopcke@bos.frb.org
FRANCESCA GOLUB-SASS, Boston College - Center For Retirement Research (CRR)
Email: golubsas@bc.edu
DAN MULDOON, Center for Retirement Research at Boston College
Email: muldoolb@bc.edu

The maturation of the 401(k) system and the enactment of the Pension Protection Act of 2006, which made 401(k) plans easier and more automatic, were expected to enhance the role that 401(k)s played in the provision of retirement income. So, originally, the release of the Federal Reserve’s 2007 Survey of Consumer Finances (SCF) seemed like a great opportunity to reassess 401(k)s. But the 2007 SCF reflects a world that no longer exists. Interviews were conducted between May and December, when the Dow Jones was at 14,000 (the peak was October 9, 2007) and housing prices were only slightly off their peak.

Given the collapse of the financial markets and the economy, this paper uses the 2007 SCF data as a starting point in evaluating the condition of 401(k)s and the factors that affect participation and contributions, and relies on more recent data and estimates to paint a full and current picture. The analysis proceeds as follows. The first section describes the evolution of 401(k) plans and how the Pension Protection Act of 2006 would be expected to improve the performance of these plans. The second section uses data from the 2007 SCF and other sources to update previous findings on participation, contribution levels, investments, and withdrawals. The third section explores in more depth how individual characteristics and plan design affect participation and contributions in 401(k) plans. The fourth section then projects how the events of 2008 have affected various aspects of 401(k) plans. The final section concludes that whereas 401(k) plans were showing some improvement in 2007 and the analysis of participation and contribution decisions confirmed the trend toward auto-enrollment and the maturation of the system, the events of 2008 highlight the limitations of 401(k) plans in serving as the only supplement to Social Security.

"Growth of Participant Direction in Defined Contribution Plans" 

Industrial Relations: A Journal of Economy and Society, Vol. 49, Issue 2, pp. 190-208, April 2010

WILLIAM E. EVEN, Miami University, Institute for the Study of Labor (IZA)
Email: evenwe@muohio.edu
DAVID A. MACPHERSON, Trinity University, Institute for the Study of Labor (IZA)
Email: David.Macpherson@trinity.edu

Using data from IRS Form 5500, this study examines the causes and consequences of the shift toward participant direction of investments in defined contribution plans. The analysis reveals that collective bargaining and pension investments in employer stock reduce the chance of a switch to participant direction, whereas below average returns increases the chance. Also, a switch to participant direction increases employee contributions to the pension and reduces the share of assets invested in employer securities.

"The Disappearing Defined Benefit Pension and its Potential Impact on the Retirement Incomes of Boomers" 

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)
Email: etoder@his.com

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.

"The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors" 

EBRI Issue Brief, No. 341, April 2010

JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science
Email: vanderhei@ebri.org

Automatic enrollment of participants in 401(k) plans, which was encouraged by provisions in the Pension Protection Act of 2006, is designed to overcome the drawbacks of voluntary enrollment by getting more workers to save in their work place retirement plan. Auto-enrollment for 401(k) plans has been demonstrated by previous EBRI research to have substantial potential benefits for some employees. This EBRI paper analyzes plan-specific data of 1,000 large defined contribution plans for salaried employees from Benefit SpecSelect™ (Hewitt Associates LLC) in 2005 and 2009 to compare a subsample of plan sponsors that did not have auto-enrollment in 2005 but that had adopted it in 2009. Actual plan information on both actual auto-enrollment and actual match rate information were coded both before and after adoption of auto-enrollment from 225 large 401(k) plan sponsors and found that the average change was positive under auto-enrollment in each of the following three categories: the first-tier match rate; the effective match rate; and the average total employer contribution rate. This analysis created a series of simulation programs using these data. The analysis indicates that the adoption of automatic enrollment in 401(k) plans is likely to have a very significant positive impact (even greater than EBRI projected in 2008) in generating additional retirement savings for many workers, especially for young and low-income workers. Under baseline assumptions, the median 401(k) accumulations for the lowest-income quartile of workers currently age 25-29 (assuming all 401(k) plans were voluntary enrollment plans as typified by the 225 large plan sponsors described above) would only be 0.08 times final earnings at age 65. However, if all 401(k) plans are assumed to be using the large plan sponsor auto-enrollment provisions, the median 401(k) accumulations for the lowest-income quartile jumps to 4.96 times final earnings (if 401(k) participants revert back to the default contribution when they change jobs) and 5.33 times final earnings (if they retain their previous contribution level when they change jobs). There are also large increases even for high-income workers: The multiple under a voluntary enrollment scenario is 2.41 times final earnings compared with 9.15 or 9.81 under auto-enrollment, depending on the assumptions for employee reversion to default contribution rates upon job change. Future EBRI research will examine the extent to which the increased 401(k) generosity resulted from modifications to defined benefit plans as pension plans were closed or frozen.

"The Congress within the Congress: How Tax Expenditures Distort our Budget and our Political Processes" 

Ohio Northern University Law Review, Vol. 36, p. 1, 2010
USC Law Legal Studies Paper No. 10-4
USC CLEO Research Paper No. C10-4

EDWARD D. KLEINBARD, USC Gould School of Law
Email: ekleinbard@usc.edu

Tax expenditures have grown in importance to the point where they are now the dominant instruments for implementing new discretionary spending policies, and operate at a cost in forgone revenues unmatched since the Tax Reform Act of 1986. While it is true that some forms of government intervention are best delivered through the tax system, it cannot be the case that neutral design principles would lead to a situation where the federal government spends twice as much through tax expenditures as it does through explicit discretionary spending programs.

This paper, the Fourteenth Annual Woodworth Memorial Lecture, is a meditation on the corrosive effect of tax expenditures on the federal budget and Congressional political processes. Tax subsidies erode our ability to conceptualize the size and activities of government, or to engage in constructive political discourse about our allocative priorities in a world of scarce resources. The paper therefore attempts to shift attention from the decades-long debate over the normative tax base from which tax expenditures should be identified to the more pressing questions of how the political process privileges tax expenditures over explicit outlays, and how in turn the lower salience of tax expenditures distorts policy making.

Tax expenditures are privileged because they are not treated as spending for any budget purpose: instead, they are budget “nothings,” and their costs are simply subsumed into the revenues baseline. The result is that their efficiency costs are typically under-appreciated (as developed in an extended fable about the country of Freedonia), and the repeal of a poorly targeted tax subsidy, rather than being hailed as curbing wasteful spending, is decried as a targeted tax hike.

Pay-as-you-go (PAYGO) rules limit the growth of tax expenditures to some extent, because they require a “pay for” to be paired with a new tax subsidy, but those rules in turn inadvertently encourage the perverse phenomenon of the Congress Within a Congress, in which the tax-writing committees, having learned how to dispense even lump sum discretionary grant programs through the tax code, can function as a complete mini-Congress. The tax-writing committees now both raise revenues (their traditional role) and spend those new revenues, through increasingly transparent tax subsidies that satisfy both the tax-writing committees’ spending priorities and the PAYGO rules. The resulting package is presented to the two chambers of Congress as revenue-neutral, and therefore implicitly as having no significant distributive or allocative consequences, when instead it should be understood as a “tax and spend” proposal.

"The 2010 Retirement Confidence Survey: Confidence Stabilizing, but Preparations Continue to Erode" 

EBRI Issue Brief, No. 340, March 2010

RUTH HELMAN, Mathew Greenwald & Associates
Email: RUTHHELMAN@GREENWALDRESEARCH.COM
CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG
JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science
Email: vanderhei@ebri.org

This paper presents key findings from the 20th annual Retirement Confidence Survey (RCS), a survey that gauges the views and attitudes of working-age and retired Americans regarding retirement, their preparations for retirement, their confidence with regard to various aspects of retirement, and related issues. The percentage of workers very confident about having enough money for a comfortable retirement has stabilized at 16 percent, which is statistically equivalent to the 20-year low of 13 percent measured in 2009. Retiree confidence about having a financially secure retirement has also stabilized, with 19 percent saying now they are very confident (statistically equivalent to the 20 percent measured in 2009). Worker confidence about paying for basic expenses in retirement has rebounded slightly, with 29 percent now saying they are very confident about having enough money to pay for basic expenses during retirement (up from 25 percent in 2009, but still down from 34 percent in 2008). Fewer workers report that they and/or their spouse have saved for retirement (69 percent, down from 75 percent in 2009 but statistically equivalent to 72 percent in 2008). Moreover, fewer workers say that they and/or their spouse are currently saving for retirement (60 percent, down from 65 percent in 2009 but statistically equivalent to percentages measured in other years). Among RCS workers providing this type of information, 27 percent say they have less than $1,000 in savings (up from 20 percent in 2009). In total, more than half of workers (54 percent) report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Less than half of workers (46 percent) report they and/or their spouse have tried to calculate how much money they will need to have saved for a comfortable retirement by the time they retire. The savings goals cited by workers who have done a retirement needs calculation have increased over time. In the 2000 RCS, 31 percent said they needed to accumulate at least $500,000 for retirement. This percentage gradually increased to 43 percent in 2005 and 54 percent in 2010. Although the age at which workers report they expect to retire shows little change from 2009, a longer-term look finds significant change. In particular, the percentage of workers who expect to retire after age 65 has increased over time, from 11 percent in 1991 to 14 percent in 1995, 19 percent in 2000, 24 percent in 2005, and 33 percent in 2010.

The 2010 Retirement Confidence Survey was conducted in January 2010 through 20-minute telephone interviews with 1,153 individuals (902 workers and 251 retirees) age 25 and older in the United States. The RCS was co-sponsored by the Employee Benefit Research Institute (EBRI), a private, nonprofit, nonpartisan public policy research organization, and Mathew Greenwald & Associates, Inc., a Washington, DC-based market research firm.

"The Recent Evolution of Pension Funds in the Netherlands: The Trend to Hybrid DB-DC Plans and Beyond" 

EDUARD H.M. PONDS, affiliation not provided to SSRN
Email: pensioenen@abp.nl
BART VAN RIEL, Government of the Netherlands - Social Economic Council
Email: b.van.riel@ser.nl

According to the classification in official statistics, Dutch pension plans have mainly preserved their DB character in recent years. The dominant reaction of pension funds to the fall in funding ratios at the beginning of this century has been a switch from final-pay schemes to average-wage schemes. This contrasts sharply with the experience in the United States and the United Kingdom, where the fall in pension funding ratios has accelerated the switch from DB to DC schemes.

This paper scrutinizes the recent evolution of Dutch pension plans: how does the evolution of Dutch pension funds diverge from that of Anglo-Saxon pension funds, and how can we explain this divergence.‘ Using an ALM framework, we argue that the current average-wage pension plans may be better viewed as hybrid DB-DC schemes, as indexation of all liabilities has been made solvency-contingent. Because these hybrid plans make use of two steering mechanisms to control solvency risk, Dutch pension funds display a high effectiveness in minimizing the risk of under-funding.

The current hybrid schemes reflect a compromise between the various stakeholders. We examine the institutional basis for this compromise, and contrast this with the situation in Anglo-Saxon pension funds, where primarily employers are responsible for absorbing funding deficits, which gives them in turn more grip on pension plan design issues. In addition, we look at the role of unions, the strong preferences within the Dutch society for collective risk-sharing, and the underlying high level of social trust, as explanations for the divergence with the experience in the US and the UK.

For the longer term, we foresee that Dutch pension plans will shift further towards stand-alone multimember plans, often being called collective DC. This will be accompanied by more differentiation in risk exposure between younger and older members.

Collective risk-sharing will thus remain an important element in Dutch pension funds. In this sense, the evolution of Dutch pension schemes diverges from the developments of Anglo-Saxon pension funds, where risks are shifted more to the individual. Finally, we argue that collective risk-sharing has some important advantages over individual risk-sharing.

"Retirement Security and the Stock Market Crash: What are the Possible Outcomes?" 

BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org
KAREN E. SMITH, Urban Institute
Email: ksmith@ui.urban.org
ERIC J. TODER, National Bureau of Economic Research (NBER)
Email: etoder@his.com

This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocks remain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941-45 and 22 percent of late boomers born 1961-65 would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to 14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly, to 19 percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed their stock market losses.