closer to retirem salary workers. It is unlikely that these work has extrem analyzed, the average The num Consequently, those that use however those over age 45 would have ely low adm ber of defined benefit plans has d ent. For exam estim inistrative expense. Writt Oral Testimony of Dallas Salisbury ated growth rates for the ple, a target etarget date funds n Testimony o date fund designed for som History and data suggest that no voluntary ers are active p eclined, along with activ ended up with sm f Dallas Salis relative to those that do not are m period from articipan bury aller m 1/1/00 through 1/20/09 ts in any other p e e participants (see one in their 30' edian 401(k) ore lan at s who Fi Prg ou por re Z tion of Lump-Sum Recipients Using Entire Portion of Their Most slide 5 their place of e program would expect to retire around 2040 has on average likely to be younger, have lower salaries, less Endnotes ranged from 29 percent for long- ).balances if they had adopted target date funds. can ever m It should be noted that mploym eet these objectives. Hi ent. Are other defined benefit plans do not tenure older participants to small em story also suggests that no m tenure, have sm ployer plans w allocation of about 90 pe more than 500 percent for just provide life incom aller acco orth mentioning? unt balan andated program rcent in equities. ces, and/or e T-157 Figure y Median “Excess” Returns from Target Date Funds, Equit Look PPA auto enrollment is raising ing At th ies e Long T Dom erm Ve inate Plan rsus the Short Terms and A Makes a Big Diffu eren to ce a HiPerc Recent D ghest enta fo g is re of thos trib T ution T ae w rget Date ih th empl rough 2 Fund In 0 oy 06er fv o sponsor e r s T tor axs Ha -Qualif ve in d h ied F g Ae ll al io nfanc th i Their As in as l S ua ra v sinc e nts ge s in , annuities. outside the governm be in plans with a sm Chairm Yet, as the individual gets clos Chairm short-tenure younger participants. Since 1974 when Congress established Indi 8. Benefi Equ an Kohl, Senato The February 2009 EBRI Issue Brief finds ti Ent ty O A v itle ler one third of defined benefit plan loan m ca etKohl, n io t H n ealler num of nt could do so as effici as G T r Martinez, Senato e ro n wT n O a be er to their targe rr g ver TMartin et Dat r of participants. The average an ime d m e As V F ez, an u en m e dently, and no program st b F d m ers of ing R ta re vidual Retirem ms have been purposely redesigned to e itir lm equ ies that those with low the committee: em b, b ers of iremen ent y y Year the committee: ts S ear such as tho of horte ent Accounts tax policy has T target date fund investor is a that allows single sum ne r g My n et d account balances am s My nam e with a 20 e is Dallas e is 10 30 years of DC growth and 20 years of DB decline Age and Tenure Affec Lifecycle Default t Balances by Participant Age and Investment Style: 2000–2006 b Ty a th rget Da e Am Emplo te F ount o yer he unfd a the M ls th pre , by P m os liu an t Re m S pic a ze ent D yman end t free isAut tribs o uu m tip on, a in tic co W Enr me ork o fe o llr r m s s Aged ent S avings. t atus 21 a,nd 1 Cha Change In nge In Figu A A re 6.v v Merag erag edian "exc e A e A ess" r c c ec c turount B ount B ns from Targa a et D lance lance ate fundss s by A From Parm ticipo anng a Co t Jan Age and. 1 Inve, sn tm 200 s enist t St8 yle e :– nt Sam 2000- Jan. 2006 20, ple 20 of0 9, 3 Date Fund, End of Year 2007 communicate an account balance versus an annui distributions could provid targe Salisbury. It is a pleasure about 2.5 years younger than those th also encouraged individuals to save dire Dallas Salisbury. I am The February EBRI Issue Brief also pres See SSA reports on Incom t re relative to contributions w tirement date, the averag presid e life incom to appear before you today. e of the elderly at ent and chief executive office e a ho were in 401(k) plans at year-end 2007 experienced de lloca at do not invest in target da e for the populat ctly for retirem tion to equities is 45 ents calculations on how long it m ty value; over 50% of those reaching ion as cost effectively. ent outside of em I will focus m r of the nonpartisan Em percent (slide 19). te funds. They m y comments on ployme ight take for nt.ake about The ICI ployee Divers partic ification is ipation rates Growing Ov 200 e7 r Retirement Accounts Have A 401 mo (k) P ng 40 art 1(k) P icipan ats, rticip bya A ng ts e an witd Tenu h Accore unt B , Jan a.lanc 1, 20 es 0 0 as of thro D ugh No ec. 31, 2 v. 26, 0072008 The "excess" is calculated by comparing the projected account balances generated by target date funds to actual account balances retirem estim significant E Private voluntary defined benefit and de $11,000 less on average in salary, have about http://www.socialsecurity.gov/policy/ Benefit Research Institu the 12/31/08 401(k) balances to r Target date funds are actively m ates th e m nt age with a defined benefit plan are iniat 37.5 m m BRI research findings that speak is investm illion individu te (EBRI) an ent losses that were typi ecover to their 1/1/08 levels. At als have tr ad Chai naged funds docs/statcomps/incom fined contribution program rmad to securing retirem 3.5 years on average le offered a single sum an of the Am itional IRAs and 18.6 m cally m that vary widely in ore than m erican Savings Education e_pop55/2006/faq.htm ent in a volatile econom a 5 percent equity rate of a dist de up by contributions: asset allocation for ss in tenure, have s ribution; and, the vast w illion ind ere created as asset ivid l There uals a y. 12.0% Plan 70% Type 1975 1986 2006 90 100 %% 600% 63% m given stated years (see s Roth IRA, and a total of 47.3 m accum $25,000 on average less in their account, and ar are differences reported based upon diffe Council. I am pleased to appear before you return assumption, those with l ajority of those offered the single sum 1.Re u 95 Supplem those with less than $10, latio %su n program lted in Individual Ass 50 entation of Social Security has been % s for the workers of those lide 19). This result ongest tenure would need nearly illion 000 in accou with som take rences in data sources. See today. All views expressed are m ed in wide variation it (Not at retirem nt ba ee in plans with an average of 1,200 less type of IRA. Both the IR employers th lanet Growth ces had an average growth of 40 left to voluntary effo at choose to create a plan ent see Vanguard' two years at the m in losses in the recen rt. Just released S and ICI report y own, a s study. edian but t nd . 10.0% 98.1% 60% 76.3% DB Number of Plans 103,000 173,000 48,000 96.8% 97.1% 97.3% 59% 59% 80% 96.4% 57% 96.0% 60% th 90% 93.1% 56% 2006 Dollar55 s % 92.5% 72.4% Still workin that a significant proportion of m They have and are m participan http://www.socialsecurit should not be attributed to EBRI, or any other approxim arket decline for sim survey data f percen ts. ately five years at the 90 g typica t during 2008. However, those with m lly y reeting that objective. om ilarly dated funds, causing som e the Federal Res y.gov/policy/docs/ssb/v67n2/v67n2p55.htm s.). the as percen sets in thes e Statemen rve shows dra tile. I 96.0individual or organization. I have personally %e IRAs were f the equity rate of t ore than $200,000 in accoun e confusion. m 92.atic increa 0% rollovers from e ses in f re l in the Social Security turn is assum am m ily asset leve ployment t balances ed to ls 8.0% 40% 85% 500% DC Number o52 f Pla % ns 208,000 545,000 631,000 70% United States Senate Tenure Distribution Year Dollars 48% 80% All 50% 6.0% based plan single sum Mr. Bulletin. worked on retirem drop to zero for the next few years, this r The num As we all are painfully aware, the m AmChairm ong the participants who inve since 1989 as a result of participation in voluntary retirem had an average loss of more than 25 percen ber of defined contribution plans ha an and ent and pension issues sinc distributions. For ex members of the sted in target date funds comm arkets h ecovery tim for the am ittee, I comm e joining the Labor De ple, in 2004 rollovers totaled $214.9 billion as grown dram ve taken a sign t. 401(k) participants on the verge of e increases to approxim end you for exploring these topics, that could be com atically ificant d ent program partm along with the number ip sin ent in 1975 as it ately 2.5 years s. ce the fall of pletely 46% 46% 30% (i 58n .3 y % ears) 44% 44% 75% 44% 43% 43% 60% AutoenroSpeci llees al Committee on Aging 79.4% 400% 42% th 41% 41% 41% 52.5% 4.0% 70% of participants in both com 2007. This is true for both defined bene identified within the study database (nam and thank you for the opportunity to appear bef 2 was organizing to fulfill its respon at the m 2. pared to contributio The m retirem edian and 9 to 10 years at the 90 oe st recent data su nt (ages 56-65) had average changes Nonautoe absolute num nns of $48.7 billion. rollees ggests th sibilities bers and as a proportion at today a fit and defined contribution plans. e of percentile (see slide 26). under the Em Th fund, target date year, and asset allocation o e IRS reported a total of 50.9 m re you today. bout 17% of all p during this period th ploye of the workforce, as well as the e Retirem rivate workers, or abou ent Incom at varied illion between a e Security IRAs t 40% DB Total Part20 ic% ipants 33 million 40 million 46.5% 46.7% 42 mi 6–l10 lion 50 65 %% See http://www.dol.gov/ebsa/PDF/2 Februar 34% 006pensionp y 25, 2009 lanbulletin.PDF and 43.9% 44.2% 2.0% 300% 11–20 num in 2004 and total assets of $3.3 tr within the fund by target date ye Act of 1974 (ERISA). I was later on the staff As I noted, nearly 1 in The performance of institutional investor ber of workers that v 20 m positiv illion w e one percen United States Senate S orkers, a i4 participan ew this p t fro 28% e a r sar), 7.2 percent were determ c hort tenure individua illion dollars. By the end of tive p lan ts between th as thei articipants in a de ps' r prim ecial Committee on Aging of t portfolios for the 2008 calendar year was he ag e Pension Benefit Guaranty Corporation, ary retirem ls ( es 56 and 65 had m 1 fi to 4 years ned benef ined the second quarter of 2008 the ent plan. (see slides 5 and 6) to be auto enrollees under i)t plan, and 5 to mo ore than 90 re than a 25 6%, or 60% DC Total Participants 12 million 37.4% 37 million 80 million 30% 10% 40% 54.9% http://www.dol.gov/ebsa/pdf/privatepens 55% 52.1% ionplanbulletinhistoricaltables.pdf and “Boomer Bust? Securing Retirement in a 0.0% 24% 32.8% 21–30 6 24% 50.0% 47.3% 47.3% 47.2% ICI estim the identification m before joining EBRI in 1978 as its f down approxim percent of their account balanc While the proportion of workers whose em about 66 m percent loss for those with long tenure (m ated assets at $4.5 tril ately 25%, acco illion workers ethodology used in the March 2009 lion, but it is safe to assum es in equities at year-end 200 rdin , are active p ig to the W rst employee. a rticip ploye ilshire Tru ore than 20 years). an r sponsors a plan or participates in a ts in a defined contribution EBRI Issue Brief set Universe Co th 7 and m at m 46.6% arket declines since that ore than 2 in 5 had mparison Service (see slide 16). plan. DB Active Part20 ic0% ipants 27 millio46 n.3% 29 million 20 million A B C D E 30 50 %% 0% http://www.dol.gov/ebsa/publi -2 20% .0% 23.cations/bullet1995/e_4.htm 5% 44.0% Volatile Economy” 45% 23.7% 50.8% 19.5% 39.9% plan has changed little tim (W more than 70 percent. Also as noted, m e have moved the number back towards the 2 9. In general, auto enrollees were younger, lowe Established in 1978, EBRI is comm ilshire T About 36 m The February 2009 EBRI Issue Brief also 17.0U % 15 CS). According to a news report “a .9% 48.4illion are s % 18.in the last 30 years, 7% eparated participan Hearing on the itted ex any sponsors are now m the number with a non-fo clusively to data dissem 004 level. Past stud ts o r salaried, m presents calculations on how long it m news rele r retirees in p ase said Taf ore likely to be in the largest ovi ay s ng to lifecycle/target rfeitable right to a ies suggest that more tatus. itnation, policy Hartley funds with ight DC Active Participan47 ts .4%11 million 35 million 66 million 20% -4.0% 40% -10% 3 100% F G H I J St44 atem .8% ent Appendix* 44.8% 44.1% 43.8% 10% 35% 42.1% 34.0% For the most recent IRS research report (2004 data) see 40.5% http://www.irs.gov/pub/irs- vested benefit has increased 71% than half plans, m research, and education on financial security assets greater than $1 billion date funds. These funds autom 3. take for the 12/31/08 401(k) balances to r Sm o of re likely to have all their account bala all em the to ployers can sponsor plans base tal assets in IRAs cam saw the worst returns at -27.49 atically rebalan . (see slide 7) The change e from employm and em ce asset allocations and m nce in target date funds, more likely to use d upon an Individual Retirem ecover to their 1/1/08 levels. At a 5 ployee benefits. EBRI does not lobby ent based pension rollovers. in vesting standards since 1974 % for the year and -15.59% for ove them ent Account to what 10% 36.0% -6.0% Dallas L. Salisbury -20% 30% 25% 21-35 36-45 0% 46-55 56-65 21-35 36-45 46-55 56-65 21-35 36-45 46-55 56-65 soi/04inretirebul.pdf 0% For a private report including projections see Private W/S Workers 68 million 90 million 118 million served to change the nature of defined bene only one target date fund, m or advocate specific policy recomm the fourth q are thought of by m I also want to em (IRA), and individuals can create an IRA. percent equity rate of return assum uarter. The m aphasize that a substantial ny pract edian perform ore likely to have 75 itioners as m eFebruary 25, 2009 ndations ance p ofit plans from tion, re "age appropriate of all m ; the m portion of these those w percent to 89 percen An estim ission is to provide objective and aster trusts for the year ended ith the longest tenure would need providing value only for longer ated 50 million have som ." Had all 401(k) participants rollovers come from t of their assets in defined e type salisbury@ebri.org 29.9% 0% 1979 1983 1988 1988 1993 1998 2003 2006 -30% up to 35 36–45 46–55 56–65 th 20 av % erage average average average most most most most most most most most $1-$499 $500-$999 $1,000-$2,499 $2,500-$4,99 Presi 9 $5d ,0 e 00 nt - & $9, C 999 EO $10,000- $20,000- $50,000 or http://www.ici.org/stats/res/fm DB 15 Acti % ve Percent 40 % -v18n1.pdf 32 % 17% service workers to providing som benefit plans. Over half of private defined equities, and be in target date funds with dates reliable research and inform Decem been in the average target date fund at the of IRA. nearly two years at the m ber 31, 2008, according to W ation. All of our ee dian but thing to ilshire data, approxim over half of those that passed through an end of 2007, 40 percent of benefit plans offer single sum research is available on the Internet at further in the future (S was -24.54% with a qu ately five years at the 90 lide 16). In particular, the participants would arterly retu distributions at rn of - 1-10 11-25 26 - 50 51 - 100 101 - 250 251 - 500 501 - 1,001 - 2,501 - 5,001 - > 10,000 Notes: < $10,000 aggressive aggr $ es 5s0 ive ,00 agg 0–$ ressi10 ve 0, ag0 gr0 es0 siv e c$1 ons9, er99 vat9 ive > cons $2 er00 v $4 ati9, v,e0 99 co 00 9 nse rvative co mo nser re vative Retirement 2000 2005 2010 2015 20 Em 20 ploy2ee 025 Benefi 2030 t Rese 20 arch 35 Insti 204 tute 0 2045 2050 Sponsorship Level Participation Level Vesting Rate Age Income 1,000 2,500 5,000 10,000 1. All asset allocations for target date funds are based on 2007 data. 4 DC Active Percent 16 % 38% 56% Chairman, em retirem 33.3 percent of those determ www.ebri.org 12.83%. The m have had at least a 20 p ployer. Sm 4. e Concern over the large num percen nt, as well as pa and our savings and financia tile. If the e all distribu edian perform e ying sm rcent decreas tions goin quity rate of return is assum ined to be auto ance of corporate all single sum g b to m er of e e in their equity concentrations. illions of m l educ enrollees were younger ployers distribu pension plans was -25.85% for the year and ation m short se and individuals that tions to m ed to drop to zero for the next few aterial is at rvice workers a illions of than age 30, while only www.choosetosave.org have not chosen to short se lso served to rvice “Boomer Bust? Securing Retirement in a Volatile Economy” See 2. Duhttp S eo tu or icn S ec o : Em o uns r://w ce p isl:toy e Enc e m eip e Bls oy eww.pbgc.gov/practitioners/plan-tren i nne e fi pl et R B an l e en s oan e eafirt Re dat ch Ia n s pr seta itu ov rch te is I e ion, s ntism t tiher tau te te s e i o e s fs t a s ti hm e M la igte h aty s neg f 1r 979, oat mi v M te b hae y 2 i a 1983, s 0 t 0o 4 t P M he c a ay 19 no em l of 88, put th ead n e v d S A au lu prv e ri of l 1 ey993 t of he " I Cn e uc x rro c em es nt P es ad "o r n pe u ds tl P u arti-and-s r n o og sn. T ra Su hm ris vey P wa ie lrl be m tic pip l quan ot a yatis t ee be ion tif T ied a ne op fitics/con itca t s a l ul M p ap tle o em rd s u en tle age. t s7 .and tent/page13270.html Source: Asset allocations of the target date funds as reported by Target Data Analytics from Morningstar Principia. American Savings Education Council a the 19 So 96ur , 2001, ce: E andB 200 RI4 ta Pabul nel of a th tio e n Su srv fr eyo of m I the ncome a EnB dR PI rog /IrC am I P Paa rtirAcc ct ipic atiip onao T nount Ba t- piDi cal M re oc dt ue led 7.la Rnce etirement Plan Data Collection Project. includes rollovers to IRAs, individual annuities, and other employment-based retirement plans Retirement Income would also represent Target Income, Target Today, Target Now, and other similar names used by Target Date Funds. Source: Author's calculations based on consistent sample data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. increase the cost of plans. Since defined workers who accum 13.7 percent of those determ -13.09% for the quarter, while public pension My concluding point today com create plans or contribute to them years, this recovery tim ulate smined not to be all am e increases to a ounts. Even es back have le contribution plans were auto enrollees were younger than age 30. to the ongoing discussion of defined benefit pproxim funds' the Pension Benefit Guaranty Corpo d to changes in public policy. T m ae tely 2.5 years at the m dian perform generally designed to ance was -24.91% for edian and 9 to he Pension ration and the 2008 annual report at http://www.pbgc.gov/about/annreports.html th 4 provide a contribution to reports significant single sum Approxim Voluntary Pension Saving in the United States the year and -13.18% for the third quarter.” versus defined contribution pl Protection A 10 years at the 90 ately 50 percent of those determ Sources: 199 c9 an t of 2006 incl d 200 m percentile. 6 A occou st workers as a s paym ans in a voluntary system nt Balan uded auto enrollm ce es: n T ts abufrom latiined to ons fe term rom t percent of EBRI be auto enrollees had salaries less than inating defined benefit plans. /ICI P eant and default investm rtic. Prior to the passage of ERISA ipansalary, faster vesting had lim t-Directed Retirement ent In this ited *This testimony expresses the views of Mr. Salisbury alone and Sources: 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan 31 7 5 1 5 Plan Data Collection Project; 2007 and 2008 Account Balances: EBRI estimates. The analysis is based on19 23 17 29 27 25 should not be attributed to any other individual or organization unless 15 11 21 13 9 The salary breakout only in Data Collection Projectcludes those participants w ; 2008 and 2009 Account Balances: EBRI estimaith complete salary data. tes. The analysis is based on im regard, the notion of conventional wisdom $20,000, compared with just over 15 nearly all defined benefit plans paid retirem pact on plan cost or purpose. Thus, well Defined contribution participants 10. Social Security was establishe diversification provisions seek To conclude, voluntary defined benefit and a consistent sample of 2.2 million pad in 1937 to provide a base le rticip percent of those using target date funds but were not an were hit hard if they were ing to (a) in ts with acco that intentioned reform e un nt t b benefits as a life incom all alancre ces at those in defined benefit plans receive life defined contribution pl a tse (a) pa he end of each y s encouraged the m rticipa e exposed to equities, as m vel of retirem ar from 1999 tion and (b) portf e annuity. Today, ans in the private ent income for ovem olio ent any specifically noted in the statement. all participants with account balances at the end of 2007 and contribution information for that year. Source:http://www.federalreserve.gov/pubs/oss/os s2/2007/scf2007home.html through 2006. © © © © © © © © © © E E E E E E E E E Em m m m m m m m m mp p p p p p p p p plo lo lo lo lo lo lo lo lo loye ye ye ye ye ye ye ye ye yee e e e e e e e e e B B B B B B B B B Be e e e e e e e e ene ne ne ne ne ne ne ne ne nefit fit fit fit fit fit fit fit fit fit Re Re Re Re Re Re Re Re Re Res s s s s s s s s se e e e e e e e e ea a a a a a a a a ar r r r r r r r r rc c c c c c c c c ch h h h h h h h h h I I I I I I I I I In n n n n n n n n ns s s s s s s s s st t t t t t t t t tit it it it it it it it it itu u u u u u u u u ut t t t t t t t t te e e e e e e e e e 2 2 2 2 2 2 2 2 2 20 0 0 0 0 0 0 0 0 00 0 0 0 0 0 0 0 0 09 9 9 9 9 9 9 9 9 9 6 from were. W determ incom nearly all those who have worked in our na most private plan participants have the option of defined benefit to defi eined to be auto enrollees, while 55.5 perc annuities and are thus protected against diversification and reba sector p hile 2007 and 2008 brought significant m rovide current r ned contribution plans. e lancing over tim tirement incom tion, and their survivors. e e. m ent of auto enrollees were in plans with to m a single sum distribution, aarket risk and longevity risk, is wrong. rkillions of et adjustm retir ent, these program e Supplem es, and hold assets f as is th entation of e ru s still hold le in or Vanguard found 15 percent of the plans they administer had adopted automatic enrollment By 3 trillions of dollars. Individual account balan more than 5,000 participants com Social Secu defined contribution plans. Our highly m What num 5. The Pension Protection Act of 2006 changed Record keep millions of workers and rity has b bers you look at m ing data sug een left to voluntary effort on the part retirees. Recen gaests th p kes a big diffe ared with at au obile ces in 401(k) plans, and sim to en 46.5 percent who were not. Furtherm workforce has m t public policy ch rence in assessing the voluntary system the rules for def rollment inc of em reased p e an ployers and individuals. idian job tenure of less than ned contribution plans ges are increasing th articipa ilar plans grew tion in a broad ore, 73.8 , as e by the end of 2007. Eighty percent of these plans had a target date fund as the default 41.5% of all workers participate through the end of 2007 (see slide percen when it put “auto- The Social S four years, and less than ten years for those t of group of plans from num auto enro becurity Administrati ers of participants and the dive enrollm llees had a to ent” into the sta under 50% to over 80%. in a plan at work, but 55.3% of on reports that over tal (insid 20). Many reports look at te th ute. rsif between 55 and 64. As a result, m e target date fund plus any equity outside This change was driven by a concern over ication o 80 percent of retirees f their ac a single average and m full-tim counts. e, full-year private have incom ost workers edian e that investment. See Nessmith and Utkus, 2008 for further information. Tenure Matters a Great Deal in Account Growth and Decline Dallas Salisbury Pr Dis otpor ribu titi on on of of Lu Ta m rget Date p-Sum R 1 e Fcip und User ients Us s,in bg y E An utir to eenr Por oltlim on of ent an Their d Most Time Needed to Recover from 2008 401(k) Losses, Retirement Plans Mo Av Who Is erage an PPA QDIA Driven Count d Median A ed Matters in st Important ccount Primary Retirement Plan Identity Has Shifted to DC wage and salary workers between 21 and 64 (s account balance acro the target date funds) equity the large number of wor supplem in both plan types earn lim 6. 11. Related to portfolios, E Mr. Chairm ents Social Security. an and m ss all accoun kers that were not ited a e allocation of 75 percent to 89 pe mbers of the comm Supplem BRI data showed m ts, b ounts with ut it is m ental retirem choosing to participate any one em ee slide 8 ore that at year end 2007 13% of 401(k) ittee, I commend you for exploring these imeportant to nt program ). Of those where the em ployer. Long tenure workers can rcent. The nonautoenrollees look at variation tied to age s are m in a voluntary defined ost important for ployer a Figure 4. Time Needed to Recover From 2008 401(k) Losses, Using Various Equity Return Assumptions Percen Recent D Nonautoe tage inr s of T tro ib llm u Us ation T re g in n et D g V t Sh a a ta r troug e itus o Fu us , an E h 2 nd q Inv ui d Age 00 ty Re e 6sto fo,turn r r Sa s H Talar a x Av - siQ y s ng , u ualif mpti an All died F of T o Tno stal hei inr Asse Equ anciia ty ts l S A in T a lloc vin aa rg get ts io ,n , Why People Save PPA Auto Enrollment Adoption By Plan Size Age and Tenure Affect Balances Extremes Show Up sponsors a plan over 87% do participate. W and tenure of participants. For example, at those for whom contr had a m accum (A ibution s u Re participants had no m topics, and thank you for the opportunity o late substantial amounts. When single su re diverse distribution, as only 40.2 pe port plan at wor ed by Social Security replaces the lo the Workers k. One larg ) oney in e reco equities and 43.4% had 80% or rd kee the end of 2007 the overa hile, from west proportion of their rcent had a total equity p to appear before you today. er, Fide ms are cho em lity ployer to em Investm sen, less than half of workers more in equities. Data e ll 401(k) m nts allocation in this ployer, the num incom , has reco e. (see slide 2). edian was rded bers Change In Average Account Balances From Jan. 1, 2008 – Jan. 20, 2009, Date Funds, by Account Balance and Automatic Enrollment Status, 2007 200 by A 7ge at Time of Most Recent Distribution, Workers Aged 21 and Over President & CEO Where So Diversification/Rebalancing Reported Perc cBalan ial Sec cu e Hi rity Pro st entages ory vides Least 72.3 years Total Assets Grew Significantly Among 401(k) Participants with Account Balances as of Dec. 31, 2007 vary dram about $19,000 com dram range. A larger percentage of these nonautoenr under the age of 50 save the enti Survey data f 20atic increases in the adoption of this ap shows widespread adoption of defaults into atically. rom pared to about $345,000 for hi the Federal Res re distribution for retirem erve shows dra proach (see slide 10) and another, Vanguard, has ollees had a gh incom lifecycle or target-dat matic increa e e llo nt, long tenured workers in their cation as do less than 50% of those ses in f s of 90 percent or more am e funds that set the ily asset levels Employee Benefit Research Institute 18 80% 70% 60’s. (see slides 21 and 22). since 1989 as a result of participation in voluntary retirem docum to equities o getting a distribution of less than $20,000 (see ented the inc asset allo r allocations cation acco rease of in actu less than 75 per rdina g to the ag l plan particip e of the cent o ation that comes with the approach. (see slides 28 and 29). New data from f equities th participant and reb ent program an the au as, to e lance the as with m nrollees had. edian values the set classes 64.0% 90% 30% Through 200 7 16 All With All With 67.1% growing from just under $18,000 to $45,000 in 2007. slide 11 Federal Reserve suggests why this is so: only ab Applying an estim Another factor of auto enrollm 70% on an ongoing basis. The forthcom ) ated decline since 12/31/2007 of 27% ent is the likelihood of being ing Marc out one third of workers have ‘retirem h 2009 EBRI Issue Brief finds that of (see slide 3). Data taken from , the average account had only invested in target date ent’ Plan Type 90.3% 1975 1986 2006 Target Date Auto- Nonauto- Target Date Auto- Nonauto- 60% 14 Chairman 80% Funds Enrollees Enrollees Funds Enrollees Enrollees 54.6% 56.7% 57.7% num funds. Those identified as auto enrollees we declined from over $65,000 on 12/31/2007 as the prim erous contributors and com those 401(k) plan participants who were in As was recognized in PP ary reason for their saving pA, and docum iled by the I s (see s to about $48,000 at 12/31/2008. re significantly more likely to have all their nvestm lide 30). Yet, saving ented for m plans that offered ent Company Institute shows dram any years by EBRI, there is very throug a target date fund, Tenureh a ‘retirement’ atic DB Number of Plans 60% 20% All 100% 7.2% 103,000 92.8% 173,000 100% 7.2% 48,000 81 92. .8 1% % 12 79.2% 79.1% 79.8% 79.0% 77.9% 47.4% 67.3% 77.7% American Savings Education Council Total Equity 51.5% 70% 50% 49.8% 1–4 46.3% Age 100% 100% 100% Allocation 100% 100% 100% asset growth in voluntary defined benefit plans, wide variation in how 401(k) participants allo assets invested in the target da A central question that our research has e plan at work 10 36.9% had at least som is the most effective an 44 te funds. As shown in slide 17 e .3% portion of their d lucrative way to save, even if not actually saving for xplored is how long it will take participants to cate their contributions defined contribution pl account in target date funds in 2007. , except for participants in the and account balances. ans, and Individual DC Number of Plans 50% 208,000 545,000 631,000 Under 30 15.1 33.3 13.7 1-9% 1.7 0.0 1.9 Washington, DC 40.7% 5–9 10% 1-4 60% 40.5% 8 30-39 27.6 28.4 27.5 10%-24% 3.2 1.7 3.4 38.2% Retirem At year end 2007 13% had no m largest plans (m rebuild acco retirem 40Am % e ent Accounts as well, am nt. And, loan provisions, hardship ong those identified as auto enrollees, ap 62. unt balan 7%ore than 10,000 participants). Over 90 percent of those autom ces going forward. The one ounting to y in equitie trillions of dollars withdrawal provisions, si February 2009 EBRI Issue Brief exam s and 43.4% had 80% or more in equities proximately 88% of those investing in . (see slide 4) ngle sum a distributions, tically ined All DB Total Participan 40% ts 33 million 40 million 42 million 40-49 28.9 22.4 29.4 25%-49% 10.6 3.0 11.2 10–19 34.8% 5-9 6 50-59 21.7 13.0 22.4 50%-74% 30.4 16.7 31.4 Au 30 to .9 en %rollees 50% (see s enrolled into target date funds this ques and other legal design features workers the fl Em lide 12 ployers and unions have been encourag target date funds invested all of their assets tion ). Such extrem against several pos es, com had all their alloca sible future ra bined with concerns over concen exibility to use ‘retirem ed by public policy to tes of retur tion in target date funds. However, for in target date funds, regardless of their n. Changes in average 401(k) trations in em voluntarily provide ent’ plans to save, ployer 0% 20–29 DC Total Participan 30% 60 or Older ts 41.5% 6.7 2.12 m 9 7.0illion 75%-89% 37 m 42.6illion 73.8 80 m 40.2 10- illion 19 30% 4 Nonautoenrollees 25.8% www.ebri.org 90%-100% 11.5 4.8 12.1 40% a 20-29 program stock, led to proposals for auto those who appeared to select target date balances were estim while using the funds to m account balance. The one clea s to assist workers in building supplem ated from eet other objectives. 1/1/08 to 1/20/ diversification. Such defau r result of the target date funds on their own, 50 per 09 based on the EBRI/ICI database of m ental savings and incom lts were provided in PPA and fund use is that it shifts cent of those in the e. Since 1974 when ore Salary 17.5% 32.7% DB Active Participan 2 ts 27 million 29 million 20 million 20% 39.4% www.choosetosave.org <$20,000 20.1 50.7 15.0 -10% 30 or more 20% 12.0% 26.3% 30% Congress enacted the E have brought increased use of funds that balan sm than 22 m allest plans to 30 percent of those in the la 0 participan illion participa 14 $20, .6% 000-$39,t' 999s asset a mn ployee Retirem 24ts. Not sur llo .8 cations away f 27.6 24.p 3 rising ent In ly th rom rgest plans had 100 percent of their assets in com ce asset classes (see slide 13), with PSCA.org all or no e im e Security pact of thing a this rec Act lloca (ERISA) a range of etions in equ nt financial m ities ac arket ross 22.1% DC Active Participan 10% ts 31.6% 11 million 35 million 66 million $40,000-$59,999 18.1 9.3 19.6 19.1% 25.7% 15.6% 2.2% 2.0% -10% -10% -5% -5% 0% 0% 5% 5% 1.8% 10% 10% $60,000-$79,999 11.4 4.1 12.6 m the target date fund. reporting (see slide 14) that by perform Conclusion inim10 u 20% all ag % m standards have been specified that ance on 401(k) account balances is a f es. 2007 nearly 65% were being defau these voluntary plans m unction of size of the lted into lifestyle or target participant' ust meet in order to s account -20% 11.2% Private Wage/Salary W $80,000-$99,999 orkers 6.5 1.68 m 9 7.3illion 90 million 118 million 0% th 21.7% 1100 13 Street NW 18.8% $100,000 or more 19.2 6.4 21.3 15.4% 11.1% 1988 1993 1998 2003 2006 median 70th median 70th median 70th median 70th median 70th rece date funds com Advocates reach d balance. Those with low 7. A sim ive f 10% EBRI research has found that if 401(k) pa ailar result held true across account vorable tax tre pared to 15% in 2002. Fi ifferent con atm account balances rela ent. clusions on what all of the data should m delity found that between September 2005 and balance size. Am tive to contributions experienced de m rticipants between th ong auto enrollees, e ages of 56 and 65 ean for future inimis DB Active Percent 40 % 32% 17% 0% Suite 878 a -30% <$ per T5 hes ,0 ce 0 e tab nt 0ile luations$ o5, nly inc 000- lude thos per e obs $ ce 10, nt erivat l0 e00- ions with co$2 mp0, let00 e sl0 ar pe - y r dc aen ta.til$4 e 0,000- $60 per ,0c 00 ent -ile $100,000- p $20 erce 0, nt00 ile0 or Defined Benefit Defined Contribution Other/Don't Know approxim Decem public po investm ERISA includes as pension plans both defi ber 2008 the m had been in the average target-date elic a nt losses that were typically m tely 80 percent of those in y. I will no 16-20 21- o 30 vem t enter that d ent in their plans wa 31-40 evesting in target date funds i bate. 41- o 50 re fund at the end of 2007, approxim I will note, however, tha than m ned benefit (such as CSRS and FERS) and s from 51-60ade up by contributions: those with less 4% to 60% using the lifecycle or 61-64 65nvested all of their assets in andt ol 401 der (k) and oth ately 40 er Source: EBRI tabulations from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. $9,999 $19,999 $39,999 $59,999 $99,999 $199,999 more DC Active Percent Washington, D.C. 216 % 005 38% 56% 25-34 Source 35- : Fe E44 qui de t y rr ea t ul r R n a nd pe es re c e45- rve nt i l e di , 20 s54 t r i but09 i on 55-64 Source: Employee Benefit Research Institute estimates of the May 1988 and April 1993 Current Population Survey employee benefit supplements and the 1996, 2001, and 2004 defined contribution plans (such target date d target date funds, regard voluntary plans are currently m than $10,00 percent of the participants would have ha e 0 in accoun fault (see slide 15). Su t balances had an averag less of their account eeting the explic as TSP). The for ch funds include m balance. However, am it objectives o e growth of 40 percen d at leas mer promis ut a 20 percent decrease in their ltiple asset class fes a ben current ong those who were not e t du public policies. fit while the later ering 2008. s and are Source: Author's calculations based on year-end 2007 data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Source: Employee Benefit Research Institute estimates from the 2004 Panel of the Survey of Income and Program Participation Topical Module 7. Panel of the Survey of In2 co02- me and P65 rogra9- m Pa067 rticipation0 Topical Module 7. Source: EBRI tabulations from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. a Age includes rollovers to IRAs, individual annuities, and other employment-based retirement plans NB: Losses are defined as the difference betw een year-end 2007 and 2008 account balances. This is NOT limited to investment loss. prom rebalanced as the m auto enrolled, the likelihood of a Different objectives would dem However, those with m ises a contribution. The Federal Govern equity concentrations. B arkets m ore than $200 ove to ma aa nd different laws participant being com sed on counte ,000 in acco intain a ‘target’ asset allocation. mrfactual sim ent had only a defined benefit plan until and regulations, but the system unt balan pletely i ces had an average loss of more ulations from nvested in target date funds years 2000 through should be Retirement plan coverage is highest among those with employer provided health Sources: 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data 32 6 1987 (CSRS), when the TSP began to operate decreased significantly as the accoun judged first against current rule than 25 percent (see slide 23). The forthco 2006, inclusive: If all 401(k) Collm ecting March 2009 EBRI Issue Brie ion Project; 2008 and 2009 s, and then the debate over wh Accounparticipants had invested in tt balan Balances: EB ce RI and new hires were m eincreased. Over 60 percent of target date stimatf will report that of those 401(k) plan es. The analysis is baether the objectives and the sed on target-date funds with the all oved to the less 24 30 28 16 26 18 10 22 14 20 12 8 2 insurance, underlining how economic security programs fit together. (see chart 9). For participants with account balances at the end of 2007 and contribution information for that year. generous FE participants who were in plans investors with account balances less than $5,000 rules should change can proceed. 401(k) participants on age-specific average equity allocations, RS defined benefit plan. At the the verge of retirem that offered a target date f Voluntary does m sam ent (ages their m e had all their assets in target date funds, tim ean voluntary. e Federal workers began to participate edian 401(k) balances would have 56-65) had average changes during und, 36.9 percent had at least some © © © © © © © © E E E E E E E Em m m m m m m mp p p p p p p plo lo lo lo lo lo lo loye ye ye ye ye ye ye yee e e e e e e e B B B B B B B Be e e e e e e ene ne ne ne ne ne ne nefit fit fit fit fit fit fit fit Re Re Re Re Re Re Re Res s s s s s s se e e e e e e ea a a a a a a ar r r r r r r rc c c c c c c ch h h h h h h h I I I I I I I In n n n n n n ns s s s s s s st t t t t t t tit it it it it it it itu u u u u u u ut t t t t t t te e e e e e e e 2 2 2 2 2 2 2 20 0 0 0 0 0 0 00 0 0 0 0 0 0 09 9 9 9 9 9 9 9 example, the EBRI Health Confidence Survey finds that over 60% of workers reported an in the Social Security program portion of their account in target date f com Mandates would clearly allow different obj this pe pared with just over 10 percent of target riod that var been larger at year-end 2006 ied between a po . sitiv for all four age cohorts analyzed. W unds in 2007. The likelihood of a participant e one date investors with ectives to be m percent for sho et. Fixed governm rt tenure ind balances of $200,000 or h ividua en the m e ls (1 to 4 nt set ost 4 increase in health costs last year and over half covered that cost by reducing their The views expressed in this statement are solely those of Dallas L. Salisbury and should not be attributed to the investing in target date funds decreased as th more (slide 18). investm years) to m There ar aggressive target date funds were compared ents would lead to o e multip re than a 25 percent loss for thos le data s different outcom ources on the num es. e age of the participant e with long tenure (m ber of to actual participant directed decisions, workers participa ore than 20 years) (see increased: 43.7 percent ting in these contribution level to retirement savings programs. Employee Benefit Research Institute (EBRI), the EBRI Education and Research Fund, any of its programs, program of participants under ag I want to end where I st slides 24 and 25). The one clear result of the ta the m s. Data from edian 401(k) balances for three of the the IRS Form e 30 com arted, with rget date fund use is that it pared with 27.0 percent of 5500 annua Social Secu l plan report is the m rity. It four age cohorts would have been larger is unique in our nation as it is does shift participant' those ages 60 or older. Those ost reliable for s asset officers, trustees, sponsors, other staff, or any other individual or organization. The Employee Benefit Small employers can choose the lower cost option of sponsoring an IRA type program 2 aggregate n with salaries less than $40,000 we allocations away from m W andatory, universal, in hile much of the focus has been on m had they been in target date funds. When umbers. Over the las all or nothing allocations volves each generation tre more likely to use target date funds than those with 35 years s ark ince ERIS et fluctuations in the in a fa in the most conservative target date funds equities across all ages (see s m A passed som ily in the support of each other, last year, investing for e trends are clear in the lide 12). Research Institute is a nonprofit, nonpartisan, education and research organization established in Washington, for their employees. The Investment Company Institute (ICI) projects that 10 million 5 voluntary private system DC in 197 salaries larger than this am This resu provides a floor of incom retiremwere com e8. Th nt security should be a long-term lts in par e testim ptic aro ipan ed to actual participant dire ny draws h (see table below): ts having a theoreti e in the event of ount. eav Furtherm ily from res worker death, disability, or retirem proposition. W earch publications ore, as tenure a cally superio cted decisions, the me rh lon nd account balance increase, the of the Em en a consistent sam g term ployee Benefit Research asset alloc dian 401(k) balances ent, pools p ale of 2.2 tion of workers are in such employer based IRA programs, representing another 8% of wage and Institute, but any errors or misinterpretations are those of the witness. likelihood of the participant us mortality so that paym taking larger risks when they are young and lo million participants who had been with th for those up to age 45 would have been larg ents are d ing target date funds declin istributed ex e sam clusively to m wer these risk e plan sponsor from er had they been in target date funds; es. (see slides 16, 17 and 18) eet a life incom s as the participant becom 1999 though 2006 was e objective, and e s 26 22 11 16 15 18 23 14 10 12 24 17 20 19 13 27 25 21 6 4 2 9 3 7 5 8 Y ears