EBRI Mr. Chairman and members of the Committee: increased to 38.4 percent. $100,000 (chart 5), less than 10 percent of those with 10 years of tenure or less have account balances of this The 402(g) limit imposed by law is a binding constraint for some workers that effectively restrains the A total of 8.9 percent of the participants made the maximum combined contribution of Company B STATEMENT OF P Chart 6 AUL J. YAKOBOSKI Table 3 Table 1 Table 4 Chart 4 Chart 1 Table 2 Table 5 2 EMPLOYEE amount of their earnings that they are able to save for retirement on a tax-deferred basis. It is older 16 percent of compensation (table 5). magnitude. However, more than 30 percent of participants in their 60s with 20-30 years of tenure with their , higher- Impact of Age and Tenure on Account Balance, Participant Deferral Rates, A Retirement Saving Plan, 1994 Participant Deferral Rates, Company C Retirement Plan, 1994: Pretax Contributions Participant Deferral Rates, Company B Retirement Saving Plan, 1994: Distribution of Account Balances Highly compensated employees for Company B were allowed to contribute up to 10 percent of salary to the saving Participant Deferral Rates, Company B Retirement Saving Plan, 1994: Participant Deferral Rates, Company C Retirement Plan, 1994: Average Account Balance, by Age and by Tenure EMPLOYEE BENEFIT RESEARCH INSTITUTE I am pleased to appear before you this morning to discuss issues regarding worker saving behavior in 401(k) BENEFIT Participants With Account Balances earning participants who are most often constrained by this limit. current employer have account balances of this size, and the percentage increases to 43 percent for those with Two different phenomena appear to be at work in determining total contribution levels in the Company C However, it is precisely at this point in a career, Highly Compensated Employees Nonhighly Compensated Employees Pretax and After-Tax Contributions Combined plan, and non-highly compensated employees were allowed to contribute a maximum of 15 percent to the plan. 1 Percent– 3 Percent–56789 More Than 402(g) Deferral plans, and in particular their contribution levels and account accumulations. My name is Paul Summary 6 Yakoboski. I am a T-117 RESEARCH plan. First, close to one-fifth of participants appear to have “maxed out” in terms of contributing as much as is i.e., when one is older and earning levels have risen, that many workers start devoting serious attention to more than 30 years of tenure. a 47.2% $180,000 Zero 2 Percent 4 Percent Percent Percent Percent Percent Percent Maximum Percentage Less Than 6 6 Percent But Less 16 402(g) Deferral Employee contributions were matched by the plan sponsor dollar 50% Less Than 3 4 Percent– -for-dollar for the first 3 percent of earnings 6 Percent– 10 402(g) Deferral Less Than Less 3 4 Percent– 6 6 Percent– More Than 6 But 10 11 Percent– 16 15402(g) 402(g)Deferral Deferral senior research associate at the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan, public INSTITUTE ® 100% a allowed by the plan and/or current legal limits. Second, slightly more than one-third of workers appear to have planning and saving for retirement. The average balances of older workers with long tenure at one employer indicate that a mature 401(k) a Zero 6 Percent Percent Than 16 Percent Percent Maximum Ratea Zero 3 Percent Percent 6 Percent 9 Percent Percent Maximum Rate a Zero 3 Percent Percent 6 Percent 9 Percent Percent 14 Percent Percent Maximum Rate Zero Than 6 Percent Less Than 16 Percent Maximum Rate contributed. Company B also had a defined benefit plan covering its employees. Given that highly compensated policy research organization based in Washington, DC. Total 3.5% 5.5% 5.7% 21.4% 7.7% 3.2% 6.9% 45.1% 1.1% 6.7% $160,000 45% 60s plan program will produce substantial account balances. For example, individuals in their 60s with at least contributed just enough to take full advantage of the company match. • Are covered workers taking full advantage of the savings opportunity presented by their 401(k) plan? Are they Total 16.8% 10.1% 29.6% 25.0% 6.9% 11.6% 6.3% employees and non-highly compensated employees faced different contribution constraints, their contribution Total 5.1% 90% 7.0% 15.0% 23.1% 25.0% 9.7% 15.1% 5.9% Age Total Total 15.1% 4.0%9.7% 21.4% 9.4% 22.1% 38.4% 11.2% 27.7% 5.1% 8.9% 5.6% 9.8% 11.6% 0.1% 7.6% 5.4% EBRI has been committed, since its founding in 1978, to the accurate statistical analysis of economic 30 years of tenure have average account balances in excess of $156,000; those in their 50s have balances in excess These findings indicate that the rates at which workers decide to contribute to the plan are directly Asset contributing the maximum amount permitted to their 401(k) account? What determines the amount that they Accumulation in 401(k) Plans Age 20s rates were analyzed separately $140,000 . Salary Age 40% security issues. Through our research we strive to contribute to the formulation of effective and responsible health Age Salary dependent upon and constrained by the specific features of the plan. Furthermore, plan features appear to interact of $117,000. 20–29 3.1 5.2 80% 6.5 28.8 8.7 3.0 3.7 41.1 0.0 6.5 do contribute? $10,000–$19,999 18.2 14.3 37.8 19.4 30s 10.4 0 6.3 20–29 0.0 18.2 27.3 27.3 27.3 0.0 0.0 4.6 EBRI and the Investment Company Institute (ICI) have collaborated in assembling the largest 401(k) database 20–29 Among non-highly compensated employees participating in the Company B plan, there was again evi- $10,000–$19,999 20.7 11.2 18.7 13.2 25.0 19.2 40.7 7.4 22.2 3.9 12.6 2.4 2.7 0 0.0 7.1 3.6 and retirement policies. Consistent with our mission, we do not lobby or advocate specific policy recommendations. 30–39 4.1 6.3 6.5 24.0 8.5 3.5 6.0 40.9 0.2 6.5 with participant demographic characteristics in determining contribution rates. In the Company C management $20,000–$29,999 22.9 13.1 34.7 19.2 10.0 0.1 5.9 30–39 5.9 10.8 16.7 24.8 40s 26.3 7.4 8.0 5.4 35% $120,000 50s 30–39$20,000–$29,999 17.5 12.9 10.9 13.7 23.7 24.1 40.1 10.7 21.3 4.7 11.9 4.7 3.7 0 0.0 6.8 4.4 dence of specific plan features or provisions driving contribution rate decisions. T currently available that has detailed information on demographic information, annual contributions, plan bal- 40–49 3.6 5.9 6.0 20.7 7.5 3.2 7.6 wenty-one percent of all non- 44.3 1.1 6.7 70% I ask that my full statement and attachments be entered into the written record. $30,000–$39,999 26.1 14.0 30.7 19.2 9.9 0 5.7 40–49 5.4 6.1 16.6 23.8 24.4 7.6 16.2 5.8 40–49 14.1 9.2 21.6 24.4 11.1 5.1 5.1 9.3 0.1 5.3 plan, the younger the participant the more likely he or she was to contribute just enough to receive the full $30,000–$39,999 10.2 15.0 41.0 22.1 50s 11.6 0 6.9 References • Our research indicates that most workers with a 401(k) plan do not contribute the maximum permitted amount 50–59 2.0 2.8 3.1 14.2 5.6 2.5 8.5 58.1 3.3 7.6 ances, asset allocations, and loans. Figures cited in this section are 1996 information on 6.6 million active partici- highly compensated participants contributed 3 percent of pay to the plan (the maximum amount matched by the $40,000–$49,999 21.9 13.0 31.9 21.9 11.2 0 6.2 50–59 3.7 4.2 9.3 18.6 26.0 18.1 20.0 6.6 50–59 30% $40,000–$49,999 9.3 5.5 3.8 14.0 16.5 17.9 42.6 13.9 25.2 6.1 12.8 10.1 22.3 0 0.1 7.5 7.7 $100,000 60s company match available. Over 46 percent of workers in their 20s contributed 6 percent of earnings to the plan 60 and over 0.5 0.7 1.6 9.7 5.3 2.4 12.3 63.0 4.5 8.1 to their plan. At the same time, our research provides stark evidence of the effect that plan features (such as 60% $50,000–$59,999 19.4 11.5 30.2 25.3 11.0 2.6 6.6 60 and over 3.1 0.0 3.1 21.9 15.6 15.6 40.6 7.0 Cerulli 60 and over Associates, Inc. The Cerulli Report: 10.5 2.0 10.0 The State of the Pension and Retirement Markets 14.0 16.5 8.5 7.0 31.0 . Boston, MA: Cerulli 0.5 8.7 plan) (table 2). This effect was more likely among younger workers than older workers and it was more likely pants in 27,762 plans holding nearly $246 billion in assets. Measured against the universe of 401(k) plans, the $50,000–$59,999 4.3 11.3 40.5 28.2 13.1 2.6 7.8 Contribution Levels in 401(k) Plans $60,000–$74,999 14.2 8.5 29.8 29.5 3.3 14.8 6.4 (table 5). Those contributing 6 percent of earnings dropped to 37.9 percent for those in their 40s and to 24.7 per- matching provisions) and legal limits can have on workers’ decisions regarding their level of contribution to a $60,000–$74,999 2.3 7.0 38.1 32.1 5.6 14.8 7.7 4 Associates, 1998. Salary25% 1996 database accounts for 9 percent of all plans, 18 percent of all participants, and 31 percent of all assets. among lower Salary (base, not W-2) -earners than among higher $80,000 -earners, analogous to the Company A findings. Twenty-five percent of Salary 50% $75,000–$99,999 10.7 6.8 27.2 28.0 1.6 25.7 6.4 $75,000–$99,999 1.7 4.7 34.0 29.8 4.1 25.7 7.7 cent for those 60 and older. Corresponding with this was a sizable increase in the proportion of participants EBRI has analyzed the contribution levels in three large 401(k) plans that had approximately 200,000 partici- plan. $10,000–$19,999 $10,000–$74,999 9.6 8.0 9.1 10.0 8.3 28.2 20.2 7.628.5 3.5 21.1 5.3 11.1 28.5 0.0 1.1 5.5 5.0 $10,000–$19,999 24.3 17.9 20.8 17.6 9.5 2.6 2.6 4.6 5 0.0 3.7 Goodfellow $100,000 or more , Gordon P., and Sylvester J. Schieber 6.8 5.1 . “Investment of 21.9 Assets in Self-Directed Retirement Plans.” In 11.0 2.0 53.1 5.6 participants in their 20s contributed 3 percent of salary The average account balance for all participants in the EBRI/ICI database is $37,323. , compared with 10 percent of those ages 60 and older 40s There is, however . , $100,000 or more 0.9 2.5 25.9 14.6 3.0 53.1 7.0 $75,000–$99,999 3.9 3.9 12.8 20.6 32.3 20.6 6.0 6.7 $20,000–$29,999 20% 6.3 7.7 9.1 27.2 8.6 3.5 6.2 31.3 0.0 5.9 “maxing out” in their contribution rate as ages increased. Less than 1 $20,000–$29,999 18.3 10.9 27.3 20.0 9.4 1 3.7 percent of participants ages 20–49 contrib- 4.3 6.1 0.0 4.4 pants combined. These plans were sponsored by IBM, $60,000 AT&T, and New York Life for their employees, and all have 40% Michael Gordon, Olivia S. Mitchell, and Marc Twinney, eds., Positioning Pensions for the Twenty-First Century. wide variation around the average. For example, 47.2 percent of participants have an account balance of less than Twenty-seven percent of participants earning $20,000–$29,999 contributed 3 percent, compared with 17 percent of Tenure $100,000 or more 2.4 5.8 10.2 18.4 24.4 0.0 38.8 6.2 $30,000–$39,999 14.3% 4.6 7.7 7.9 24.4 8.2 3.4 6.6 37.1 0.0 6.2 $30,000–$39,999 Tenure 14.6 9.1 19.1 24.6 11.0 5.3 5.7 10.6 0.0 5.5 uted 16 percent of compensation to the plan. Twelve percent of participants in their 50,s maxed out, compared employer matching provisions to encourage employees to participate and contribute. There are constraints placed • Findings indicate that older workers tend to have their contributions constrained by maximum limits (plan or 2 years or less 4.9 9.3 43.0 26.0 12.7 4.0 7.8 Philadelphia, P $40,000–$49,999 A: University of Pennsylvania Press, 1997. 3.5 6.0 6.3 23.0 8.5 3.3 6.4 43.0 0.0 6.6 $10,000, while 9.8 percent have an account balance in excess of $100,000 (chart 1). those earning $60,000 or more. Like the Company $40,000–$49,999 13.2 8.0 19.0 A 21.2 findings, there was evidence among non-highly compensated 14.6 6.3 6.0 11.5 0.0 5.9 15% 2 years or less 1.7 7.8 45.0 27.2 14.3 4.0 8.3 Statement Tenure 30% $40,000 30s 1 with 21 percent for participants 60 and older (table 5). 2+ years to 5 years 8.7 11.7 37.7 23.8 10.9 7.2 7.2 on employees’ legal), probably because they tend to be more focused on retirement and thus more likely to contribute at maximum contribution levels, set by both the specific plan and federal law. These plans also have 9.8% $50,000–$59,999 3.1 5.1 5.2 21.5 7.4 3.1 6.8 47.8 0.0 6.8 $50,000–$59,999 2+ years to 5 years 9.4 3.3 7.0 10.0 18.1 24.3 41.1 11.3 26.0 6.8 12.5 7.6 15.4 7.2 0.0 7.9 6.6 Poterba, James M., Steven F. Venti, David A. Wise. “Implications of Rising Personal Retirement Saving.” NBER participants in the Company B plan of clustering at the maximum contribution amounts, particularly among older 1 year to 2 years A participant’s account balance, and thus the variability across participants, depends upon a number of 2.8 15.9 14.0 21.5 32.7 4.7 8.4 5.5 8.4% Before the Senate Finance Committee 5+ years to 10 years 13.3 10.3 33.7 24.8 8.0 9.9 6.7 $60,000–$74,999 2.5 4.0 4.3 18.7 7.2 2.9 7.0 53.4 0.0 7.1 $60,000–$74,999 7.1 7.7 16.6 26.0 10.1 7.7 10.7 11.8 2.4 6.9 The relationship between contribution rates and participant earnings in the Company C management 5+ years to 10 years 4.0 8.8 40.1 27.2 10.0 9.9 7.7 well-developed educational programs designed to assist workers in making appropriate decisions regarding their higher levels. Many younger workers recognize the value of the employer match, contributing just enough to 2+ years to 5 years 5.3 7.6 14.7 21.8 25.3 11.8 13.5 6.1 10% 20% Working Paper No. 6295. Cambridge MA: National Bureau of Economic Research, November 1997. $20,000 factors. Some of these are specific to the individual and others reflect features of the plan. participants. T 10+ years to 15 years en percent of non-highly compensated participants contributed 15 percent of pay (the plan maxi- 17.6 10.8 5.7% 29.2 24.2 5.9 At the participant level 12.3 6.1 $75,000–$99,999 2.1 3.1 2.9 16.1 5.8 2.4 7.7 59.9 0.0 7.5 $75,000 or more 10+ years to 15 years 0.0 4.2 0.0 9.5 0.0 0.0 38.8 100.0 27.1 0.0 8.1 0.0 0.0 12.3 0.0 7.5 8.0 4.1% 5+ years to 10 years 4.3 7.2 19.1 27.8 24.9 6.2 10.5 5.4 plan is somewhat unique, in that participants earning $40,000 20s -$50,000 annually were relatively more likely to participation in a 401(k) plan. take full advantage of that plan feature – but no more. 15+ years to 25 years 21.0 10.8 26.9 3.1% 24.2 5.3 11.7 5.8 U.S. Department of Labor $100,000 or more . Pension and W 1.7 2.5 elfare Benefits 2.5 13.1 Administration. 7.5 6.4 Abstract of 1994 Form 5500 Annual 10.3 13.3 42.8 7.5 are income, contribution rate, age, length of plan participation, asset allocation, rollovers from other plans, mum), and essentially no one was constrained by the legal maximum of $9,240 (table 2). While 31 percent of 15+ years to 25 years 4.9 11.2 37.6 27.42.5% 7.2 11.7 7.2 5% 10+ years to 15 years 7.5 9.8 16.1 24.1 20.7 2.0% 8.0 1.6% 13.8 5.3 Tenure 10% 1.3% Over 25 years 19.2 7.5 Hearing on 23.9 27.4 6.2 15.7 6.3 contribute the amount corresponding to the maximum match (i.e., 6 percent), than were either lower $0 - or higher- Over 25 years 3.0 7.3 35.0 30.1 8.8 15.7 7.9 Reports. 15+ years to 25 years Washington, DC: U.S. Government Printing Office, 1998. 4.6 4.3 14.4 22.6 22.3 11.9 19.9 6.1 withdrawals, and borrowings. Plan features include age of the plan and employer contributions. These determi- workers in their 60s or older and 22 percent of those in their 50s contributed the maximum allowable of 15 per- 1 year to 2 years 9.6 20.6 26.1 21.6 10.4 3.0 5.1 3.6 0.0 4.3 0–2 2–5 5–10 10–20 20–30 > 30 Tenure earners. However, once this threshold level of compensation was obtained, the percentage of participants contrib- Increasing Savings for Retirement • Age As an example, in one plan studied, the younger the participant, the more likely he or she was to contribute Company A Over 25 years 5.9 2.2 9.6 18.4 30.9 13.2 19.9 6.6 0% Years 2+ years to 5 years Age 16.0 11.2 0% 27.9Years 22.9Years 9.3Years 4.0Years 2.7 Years 5.9 0.1 4.4 nants of account balances complicate the interpretation of average balances. cent, only 3 percent of participants in their 20s did likewise. The fraction of non-highly compensated participants 2 years or less 1.4 4.7 6.5 30.8 9.8 3.3 2.4 39.5 1.6 6.5 20–29 12.1 11.2 40.6 23.8 8.8 3.5 6.7 0–2 2–5 5–10 10–20 20–30 > 30 < $10k $10k–$20k $30k–$40k $40k–$50k $50k–$60k $60k–$70k $70k–$80k $80k–$90k $90k–$100k > $100k uting 6 percent of pay to the Company C management plan decreased steadily from 42.6 percent of participants 5+ years to 10 years 16.5 $20k–$30k 7.7 23.4 21.9 11.1 4.8 5.4 9.3 0.0 5.2 just enough to receive the full company match available. Close to 30 percent of workers in their 20s in the plan 20–29 4.0 9.4 46.5 26.3 10.3 3.5 7.5 Sex Tenure 2+ years to 5 years 2.3 5.6 6.3 26.6 8.3 2.7 3.2 44.7 0.4 6.6 Endnotes contributing 15 percent increased from 5 percent among those earning $10,000–$19,999, to 15 percent among The relationship between account balances and two of the determinants can be examined using informa- Years Years Years Years Years Years The maximum contribution allowed under the Company 30–39 15.9 11.6 33.2 A savings plan was 9 percent of earnings. The match rate 24.1 6.3 8.9 6.2 3 10+ years to 15 year 30–39 15.7 4.5 8.9 10.3 16.0 24.8 41.1 12.9 27.2 5.7 7.9 6.8 9.2 8.9 0.0 7.3 5.5 earning $40,000–$50,000 annually to 25.9 percent of those earning $100,000 or more (table 5). Male 5.3 7.4 16.2 22.6 23.1 9.4 16.0 5.7 contributed this amount, compared with 21 percent for those in their 40s and 10 percent for those 60 and older 5+ years to 10 years 3.4 5.3 5.9 24.1 8.1 3.2 6.1 43.7 0.2 6.6 . 40–49 19.7 10.5 27.7 Tenure 24.6 5.5 12.1 5.9 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. tion in the EBRI/ICI database. One of these is participant age and the other is tenure of the participant with those earning $50,000–$59,999. 15+ years to 25 years 16.2 9.4 16.2 20.7 12.1 5.4 7.2 12.9 0.1 5.9 1 in the Company 40–49 A plan was 30 cents on the dollar for the first 5 percent of earnings that an employee contributed. 4.3 10.4 37.9 27.6 7.6 12.1 7.4 Female 4.3 5.6 10.3 24.9 32.2 10.7 12.0 6.3 In 1994, the year for which data were available, the maximum legal 401(k) pre-tax employee contribution (the 402(g) 10+ years to 15 years 4.1 6.0 6.1 22.3 8.0 3.4 7.0 42.7 0.3 6.6 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 50–59 Higher-earners were relatively more likely to max out their contribution at 16 percent than were lower 14.7 6.1 22.5 28.2 9.6 19.0 7.2 - At the same time, as ages increased, there was a sizable increase in the proportion of participants “maxing out” Over 25 years 50–59 10.8 2.1 3.5 15.5 5.4 20.1 31.1 12.3 29.8 9.3 12.5 8.0 20.1 19.0 0.5 8.6 7.4 employer Among highly compensated participants in the Company B plan, there was evidence both of clustering at , which serves as a proxy for length of participation in the plan. Age and account balance should generally Company maximum) was $9,240. 15+ years to 25 years A also had a defined benefit plan in place for its employees. 4.0 6.2 6.5 21.0 7.6 3.2 7.5 43.1 0.9 6.6 60 and up 11.5 2.8 18.3 28.2 16.3 22.9 8.5 Marital Status Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. earners, until the 402(g)(1) limit becomes binding. 60 and over 1.0 3.3 Approximately 12 percent of participants earning under 24.7 26.1 21.9 22.9 10.0 in their contribution rate. Forty-one percent of participants ages 20 to 39 contributed the maximum amount Over 25 years 2.3 3.4 3.2 14.9 6.1 2.9 8.1 55.6 3.6 7.4 Gender be positively related, as younger workers are likely to have either lower incomes or shorter periods of plan partici- that maximum match amount (3 percent of pay) and significant clustering at the plan-imposed contribution limit 2 by Single There were two notable points of cluster in the distribution of contribution rates in the Company 6.1 6.5 13.5 20.0 31.8 11.0 11.0 6.1 A plan: Since 401(a) contributions are not counted as part of the 402(g)(1) limit, the percentage of participants hitting the limit on Sex $40,000 a year contributed a combined 16 percent of pay to the plan, and this proportion increased steadily to permissible, compared with 44 percent of participants in their 40s, 58 percent for those in their 50s, and 63 Male Gender 13.9 9.3 21.2 25.0 11.5 5.3 5.0 8.6 0.1 5.3 Married 4.8 7.2 15.5 24.2 22.6 9.3 16.5 5.8 pation than older workers. In line with this observation, nearly 60 percent of those participants with account (10 percent of pay) or the legal contribution limit. Twenty-seven percent of highly compensated participants in 21 percent of participants contributed 5 percent of pay to the plan and 45 percent contributed 9 percent of pay elective deferrals will not change between tables 4 and 5. Paul J. Yakoboski, Ph.D. Male 16.4 9.4 30.2 25.0 5.7 13.3 6.2 Gender Female Male 15.6 3.6 9.9 21.4 8.6 20.8 39.3 11.0 27.7 5.0 7.6 5.8 10.3 13.3 0.1 7.5 5.4 13.1 percent of those earning $50,000-$59,999 (table 5). Less than 6 percent of those earning $60,000 or more percent for participants ages 60 and older Unknown 3.7 7.4. 11.1 14.8 40.7 11.1 11.1 6.6 Female 17.6 11.2 28.6 25.0 9.0 8.7 6.5 balances less than $10,000 are in their 20s and 30s, while less than one-fifth are in their 50s or 60s (chart 2). 3 their 20s and 17 percent of those in their 30s contributed 3 percent of pay to the plan (table 3). This fell to 3 per Male 3.3 5.6 5.6 21.9 8.1 3.3 6.8 44.2 1.3 6.7 - (table 1). Two different phenomena appear to be at work in determining participant contribution levels in the Female 4.6 10.7 36.9 27.8 11.2 8.7 7.7 Note that the lower percentage of those with compensation in excess of $100,000 can not be explained by the 401(a)(17) Senior Research Associate Marital Status contributed the maximum 16 percent of pay allowed by the plan. In 1994, the maximum legal 401(k) pretax Race Female 4.0 5.2 6.2 20.3 6.6 3.0 7.1 47.2 0.4 6.8 Similarly cent of those ages 60 and older Race , of those with account balances greater than $100,000, more than one-half are in their 50s or 60s, while . A noticeably larger fraction of those with earnings under $75,000 also contributed Company limits, since the 402(g)(1) limit of $9,240 for the year is more than $150,000 times 6 percent. A plan. First, close to one-half of participants appear to have “maxed out” in terms of contributing as Single Race 16.8 12.1 22.6 20.5 10.1 5.4 5.1 7.3 0.0 4.9 White 4.9 6.9 14.9 22.5 24.9 9.9 16.0 5.9 employee contribution was $9,240, which means that anyone earning in excess of $57,750 a year would be pre- • Plan features also appear to interact with worker earnings in determining contribution rates. Lower-earning White 16.2 9.7 30.5 25.5 6.7 11.4 6.4 Married 14.0 8.4 20.5 23.1 12.1 5.0 5.6 11.1 0.2 5.6 one in 10 are in their 30s and virtually none are in their 20s. 3 percent to the plan. 4 White 3.5 8.7 39.6 28.2 8.7 11.4 7.6 much as the plan allowed. Second, one-fifth of workers appear to have contributed just enough to take full advan- Nonwhite 6.7 8.4 15.1 27.7 26.1 8.4 7.6 5.5 Plans and participants represent 1997 estimates from Cerulli (1998), while assets are for 1996. Marital Status Nonwhite 19.8 12.0 25.5 Chart 5 22.7 7.7 12.3 6.1 vented from putting the entire 16 percent of compensation into the 401(k) plan. participants are more likely to contribute the maximum amount that is matched, taking advantage of all the Unknown Nonwhite 13.0 6.3 6.0 12.5 20.9 23.3 33.1 Chart 7 9.8 25.6 3.7 10.1 9.3 14.0 12.3 0.0 7.4 6.2 Single T Tenure and plan balances also have a positive association, as long-term employees likely have had a wenty-five percent of all highly compensated plan participants contributed either 10 percent of pay or 3.9 5.6 6.0 21.4 7.0 3.1 6.7 45.8 0.5 6.7 tage of the company match. 5 Impact of Age on Account Balance Reported balances are net of plan loans. There is an extremely wide range of estimates of average account balances in 401(k) Employee Benefit Research Institute Impact of Age and Tenure on Account Balance, Chart 3 “free” employer money that is available. Higher earners are more likely to contribute the maximum amount Source: Employee Benefit Research Institute. Married Chart 2 3.4 5.4 5.7 21.5 7.9 3.2 6.9 44.8 1.2 6.7 Source: Employee Benefit Research Institute. Race longer period in which to accumulate assets. In fact, nearly 60 percent of those with balances less than $10,000 $9,240 to the plan. Not surprisingly, for highly compensated employees the legal maximum was most often the These findings indicate that the rates at which workers decide to contribute to the plan are directly a Source: Employee Benefit Research Institute. plans. The Department of Labor (DOL, p. 85) provides an average account balance per active participant for 1994 of $26,766. a Includes participants constrained by the 402(g) maximum contribution limit. Participants With Account Balances Tenure Composition of Selected Includes participants constrained by the 402(g) maximum contribution limits. UnknownAge Composition of Selected 2.5 4.4 4.4 17.0 7.6 2.1 8.7 52.2 1.1 7.2 White 13.0 8.9 21.6 22.4 11.4 5.3 6.1 11.3 0.1 5.7 Implications allowed by the plan or the tax code.2121 K Street NW, Suite 600 a Includes participants constrained by the 402(g) maximum contribution limits. have five or less years of tenure, and almost 90 percent of those with balances of more than $100,000 have at least binding constraint rather than the plan maximum. Fifteen percent contributed $9,240 to the plan and an addi- dependent upon and constrained by the specific features of the plan. Furthermore, plan features appear to interact However, the Goodfellow and Schieber (1997) study of 90% Nonwhite 20.5 12.0 20.7 21.1 10.8 4.8 Account Balance Categories 4.3 5.9 0.0 4.5 Account Balance Categories Washington, DC 20037 These findings provide stark evidence of the dramatic effect that plan features, i.e., the matching formula and 24 plans found an average balance of $38,234, and a recent study by the Profit Sharing/401(k) Council of Race America indicated 10 years of tenure (chart 3). tional 10 percent contributed 10 percent of pay. Older workers were much more likely to “max out” even among with participant demographic characteristics in determining contribution rates. In the Company A plan, the 80% 50% Source: Employee Benefit Research Institute. • These findings indicate that while legal and plan-specific contribution limits do not constrain most plan White 3.2 5.2 5.5 21.6 8.0 3.3 < $10,000 6.8 45.4 1.1 6.8 that the average balance for participants in their survey was $75,000 in 1996 (Bureau of National Affairs, 1998). The latter Voice: 202/775-6300 maximum allowable contribution levels, and legal limits can have upon workers when they are deciding how much the highly compensated. No participants in their 20s and 15 percent of those in their 30s contributed either The effect of participant age and tenure is revealed more clearly by examining the effect of the interaction younger the participant, the more likely he or she was to contribute just enough to receive the full company match a Includes participants constrained by the 402(g) maximum contribution limit. Nonwhite 4.8 6.7 6.8 20.9 6.2 2.8 7.5 43.6 0.7 6.5 number could be considered as an upper bound since it includes profit-sharing and combination plans as well as 401(k) plans. participants, they do constrain the amount that some individuals (particularly older and higher >$100,000 -earning 70% to contribute to a plan. While most workers do not “max out” with their 401(k) contributions, in the three plans Fax: 202/775-6312 of the two variables on account balances. For a given age group, the average balance should increase as tenure 10 percent of pay or the legal maximum of $9,240, compared with 56 percent of those ages 60 and older who were 45% available. Close to 30 percent of workers in their 20s contributed 5 percent of earnings to the plan (table 1). The Age 6 individuals) actually save for retirement through their 401(k) plan at a point when many are just focusing on In one important respect, however, the average balance of the 60s age group with over 30 years of tenure may understate the 100% 20s Source: Employee Benefit Research Institute. analyzed, 30 percent or more of the participants have their contribution rate directly affected by plan design 60% increases: constrained either by the plan limit or the legal limit. Thirty-nine percent of participants earning $100,000 or A 30-year-old participant, for example, with 10 years of tenure should, on average, have accumulated a percentage contributing 5 percent of earnings dropped to 21 percent for those in their 40s and to 10 percent for Internet: http://www.ebri.org 100% a potential balance because participants in this group could actually have been in a true 401(k) plan for no more than a fraction 40% the need to save. Includes participants constrained by the 402(g) maximum contribution limit. 30s (maximum matches or contribution limits) or legal limits on contributions. larger plan balance than a 30-year more were constrained by the legal maximum, while 27 percent of those earning $75,000–$99,999 and 12 percent -old with two years of tenure. This positive relationship is shown in chart 4, those 60 and older. 90% 50% of that time, given legislative and regulatory chronologies. However, some of these balances are undoubtedly conversions from 90% 40s In addition, these features can affect different workers in different ways. More specifically, participants of which plots the average account balance by tenure for each age group. The average account balance for each age of those earning less than $75,000 were constrained by the either the plan maximum of 10 percent or the $9,240 Corresponding with this, there was a sizable increase in the proportion of participants “maxing out” in 35% pre-existing profit-sharing plans. 40% 50s 80% • The average account balance (net of plan loans) for all 401(k) participants is $37,323, and the median balance 80% >30 differing age and earning levels will respond to different features of the plan (matching formula versus contribu- group increases, almost without exception, as tenure increases. legal limit (table 3). The increase is present for all age groups but is their contribution rate as ages increased. Forty-one percent of participants ages 20-39 contributed 9 percent of A more appropriate way to examine this issue is to project account balances over participants’ working lifetimes under a 60s 60s is $11,600 (1996 data). Reported account balances do not reflect additional retirement savings held in predeces- 30% 30% 20–30 variety of assumptions. Poterba, V 70% enti and Wise (1997) have investigated the magnitude of 401(k) account balances at retire- tion limits) in deciding how much to contribute. Older workers tend to be more focused on retirement and thus are especially large for those in their 50s and 60s. In addition, for each tenure group, the average balance rises with earnings to the plan, while 44 percent of participants in their 40s maxed out. This jumped to 58 percent for those 70% 50s sor plans or rolled over into individual retirement accounts (IRAs). Nor do the balances indicate what savings 10–20 ment age. To judge the relative importance of potential 401(k) contributions, they compare projected 401(k) assets of future more likely to contribute to a plan at higher levels and are more likely to be constrained by maximum limits (plan 20% age. Company C in their 50s and 63 percent for participants 60 and older (table 1). 25% 60% 60% 5–10 generations with the 1992 assets of the Health and Retirement Survey (HRS) sample. The mean of 401(k) assets for the entire would be in a “mature” 401(k) plan program. February 24, 1999 40s or legal). Many younger workers at least recognize the value of the employer match and contribute enough to take An examination of the distribution of account balances underscores the effects of age and tenure. For This same relationship also applies to contribution rates and participant earnings. In the Company A 10% 2–5 sample was only $10,808, but this was significantly affected by the majority of the respondents having had no 401(k) accounts. The maximum contribution allowed under the Company C management plan was 16 percent of compensation. The 50% 20% 30s 50% full advantage of that plan feature. In fact, the matching formula seems to effectively determine the contribution example, overall, approximately 85 percent of all participants in their 20s have account balances of less than plan, lower-earning participants were relatively more likely to contribute the amount corresponding to the maxi- 0–2 Using historical experience to project future contributions, the authors find that, on average, a 37-year-old in 1996 would have match rate in the plan at that time was 66-2/3 cents on the dollar for the first 6 percent of earnings that an 0% • Nearly one-half of the participants have account balances with their current employer of less than $10,000, 20s rate for many participants, particularly younger ones. The maximum contribution limits imposed by the sponsor $10,000 (chart 5). However a 401(k) balance upon retirement at age 65 of $91,600, and a 27-year 40% , only 62 percent of those in their 20s with five to 10 years of tenure have account -old in 1996, retiring at age 65, would have $125,500 mum match (i.e., 5 percent), than were higher-earners. The percentage of participants contributing 5 percent of 40% 15% 20s Total 30s Total 40s Total 50s Total 60s Total employee contributed. Participants in this plan are allowed to make pretax contributions to a 401(k) plan as well while nearly 10 percent have balances in excess of $100,000. Those individuals with balances less than $10,000 (measured in 1992 dollars). The calculations assume that one-half of the 401(k) money was invested in stocks and one-half in or the tax code, however, serves to act as a constraint more often for older employees. balances less than $10,000; the remaining balances exceed this figure (chart 6). pay to the Company A plan decreased steadily from 28 percent of participants earning $10,000–$19,999—13 per Age - 30% 30% as contributions to a 401(a) plan that requires after-tax contributions. Although there is a tax differential at the are primarily young workers or workers with short tenure with their current employer. In contrast, those with bonds, and that average returns experienced since 1926 would be realized. 10% Plan features also appear to interact with worker earnings in determining contribution rates. Part of this The effect of tenure and age is even more pronounced for older workers. For example, 30 percent of those cent of those earning $100,000 or more (table 1). Correspondingly, higher-earners were relatively more likely to time of contribution for the employee, both types of contributions are eligible for the employer match. Table 4 balances in excess of $100,000 are older workers with long tenure. Approximately one out of every four partici- 20% Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 20% effect could be attributed to a correlation between earnings and age, i.e., older workers tend to have greater participants in their 60s have account balances less than $10,000 (chart 5). However, among those with short max out their contribution at 9 percent than were lower-earners. Twenty-nine percent of participants earning 5% provides information on 401(k) contributions while table 5 provides similar information for total contributions pants in his or her 60s had an account balance with the current employer in excess of $100,000. Similarly, earnings. However, there is also surely a separate effect attributable to earning levels. Lower-earning participants tenure (zero to two years), 77 percent of these older participants have account balances under $10,000 while less $10,000–$19,999 contributed 9 percent of pay to the plan, and this proportion increased steadily to 60 percent of 10% 10% (both pre- and post-tax). Company C also had a defined benefit plan in place for its employees. approximately 31 percent of workers with 20 or more years of tenure with their current employer had account 0% may feel that they cannot afford to contribute the maximum amount allowed by the plan, but they at least want to than 20 percent of those with long tenure (more than 20 years) are in this range (chart 6). One explanation for the those earning $75,000-$99,999. Only 13 percent of those earning $100,000 or more contributed the maximum The views expressed in this statement are solely those of the author and should not be attributed to the 0% 0–2 2–5 5–10 10–20 20–30 > 30 0%There were four notable points of cluster in the distribution of 401(k) contribution rates in the Company C balances in excess of $100,000. take advantage of all the “free” employer money that is available and therefore they are more likely to contribute low account balances among this 20 percent may be that their employer Years Years Years Years Years Less th ’s 401(k) plan was only recently estab- Years an $10,000 More than $100,000 9 percent of pay allowed by the plan, but this is explained by another constraint faced by plan participants. In Less than $10,000 More than $100,000 Employee Benefit Research Institute, or the EBRI Education and Research Fund, its officers, trustees, plan: 16.8 percent made no contributions during the year; 29.6 percent of participants contributed 6 percent of pay Tenure the maximum amount that is matched. Higher-earners likely do not feel as constrained regarding the amount of lished. 1994, the maximum legal 401(k) pretax employee contribution was $9,240, and 43 percent of Company A plan sponsors, or other staff, or to the EBRI-ERF American Savings Education Council. The Employee Benefit to the plan; 6.9 percent contributed 16 percent of pay; and 11.6 percent were limited by the 402(g)(1) maximum Source: Tabulations from EBRI/ICI Participant-Directed Retirement money they have available to save, and therefore they are more likely to contribute the maximum amount allowed Source: Tabulations from EBRI/ICI Participant-Directed Retirement Chart 7 shows the effect of age and tenure on account balances for those participants with balances more participants earning $100,000 or more contributed this amount to the plan (table 1). They were therefore also Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Research Institute is a nonprofit, nonpartisan, public policy research organization which does not lobby or limit on 401(k) contributions (table 4). However, when total contributions are analyzed, those who made no Plan Data Collection Project. Plan Data Collection Project. by the plan or the tax code. than $100,000. Although approximately 25 percent of participants in their 60s have account balances in excess of maxing out in terms of their allowable contribution to the plan. take positions on legislative proposals. contributions drops to 4.0 percent while those who contributed just enough to maximize the employer match 11 7 9 6 4 5 10 12 13 14 8 2 3 1 Percentage of Participants With Account Balances in Specified Ranges Percentage of Participants With Account Balances in Specified Range Percentage of Participants With Account Percentage of Participants With Account Balances in Specified Range Balances in Specified Range