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How Automatic Enrollment Affects the Likelihood and Distribution of 401k Contributions Evidence from a National Survey Retirement Research Consortium August 7 2014 Jack VanDerhei EBRI Research Director ID: 408196

escalation automatic plan contribution automatic escalation contribution plan enrollment contributions participation rates plans retirement data jack impact percentage employee

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Discussion of: How Automatic Enrollment Affects the Likelihood and Distribution of 401(k) Contributions: Evidence from a National Survey Retirement Research ConsortiumAugust 7, 2014Jack VanDerheiEBRI Research Directorvanderhei@ebri.orgSlide2

Overview

What are you missing with a sample aged 55+?Impact of automatic enrollment (AE) on participation rates by ageWhat are you missing if you treat all AE plans the same?Default contribution ratesAuto escalationWhat happens when you combine the increase in participation rates under AE with the new behavior in employee contributions?Percentage of workers eligible for AE with a larger simulated employee contribution under Voluntary Enrollment (VE), by tenureWhat does it mean in the long run?

Percentage of

Successful Simulated Retirements

by Income Quartile: VE vs. AE 401(k) PlansSome potential data/methodological considerations Time permitting

2Slide3

Impact of plan design on participation rates by age

3Source: Stephen P. Utkus and Jean A. Young. “How America Saves 2014, A Report On Vanguard 2013 Defined Contribution Plan Data.”

Sample limited to

ages 55 to 69 Slide4

Importance of AE plan design variables for employee contributions

: Ratio of median contributions for plans with 6 percent default and auto-escalation vs. those with 3 percent default and no auto-escalationBy ageBy age-specific salary quartiles

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Conditional upon participation

Limited to employees with 4 or less years of tenure and at least $10k in salary

Filters out plans that implemented AE between 1/2/2008 and 12/31/2011Slide5

Percentage of workers eligible for AE with a larger simulated employee contribution under VE, by tenure

5Source: Author’s simulations for WSJ, May 2011Slide6

Percentage of Simulated Successful* Retirements

by Income Quartile: Voluntary Enrollment vs. Automatic Enrollment 401(k) Plans6Plans are assumed to have automatic escalation with a 1 percent of annual compensation increase and

plan-specific

default contribution rates. Employees are assumed to

retain their previous level of contributions when they participate in a new plan and opt-out of automatic escalation in accordance with the probabilities in VanDerhei (September 2007)Slide7

Potential data/methodological considerations

Only applies to those 55+2008 and 2010 data does not allow one to observe the importance of auto-escalation (primarily post-PPA)Definition of AE used in the studyIs it possible that this is picking up employees who started prior to the plan’s AE implementation date?Several industry surveys have continued to show that AE provisions are typically NOT applied retroactivelyThe disparity between AE participation rates (relative to VE) for this study and those in industry and academic studies may suggest that respondents are answering the AE question in the affirmative when they shouldn’t Is the “automatic enrollment” feature of DB a potential confusion here?7Slide8

References

Utkus, Stephen P. and Jean A. Young. “How America Saves 2014, A Report On Vanguard 2013 Defined Contribution Plan Data.”VanDerhei, Jack (January  2014), The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,  EBRI NotesVanDerhei, Jack (October 2011), What Do You Call A Glass That Is 60–85% Full? Pension Section News, Society of Actuaries.VanDerhei, Jack (September 2007).  The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income EBRI Notes.VanDerhei, Jack and Lori Lucas (November 2010), The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy, EBRI Issue Brief

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