The Impact of the Recent Financial Crisis on 401(k) Account Balances

The Impact of the Recent Financial Crisis on 401(k) Account Balances

Volume 326

Pages 24

A new EBRI analysis of the impact of the recent financial crisis on average 401(k) retirement plan balances from Jan. 1, 2008, to Jan. 20, 2009, shows that participants’ losses were largely determined by their account balance, age, and job tenure.

401(k) losses from the economic crisis: During 2008, major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37.0 percent for the year, which translated into corresponding losses in 401(k) retirement plan assets. But how individual 401(k) participants are affected by the crisis is largely determined by their account balance, age, and job tenure.

Impact varies by account balance: This Issue Brief estimates changes in average 401(k) balances from Jan. 1, 2008, to Jan. 20, 2009, using the EBRI/ICI 401(k) database of more than 21 million participants. Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant's account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent.

Impact varies by age and job tenure: 401(k) participants on the verge of retirement (ages 56–65) had average changes during this period that varied between a positive 1 percent for short-tenure individuals (one to four years with the current employer) to more than a 25 percent loss for those with long tenure (with more than 20 years).

Short-term vs. long-term: While much of the focus has been on market fluctuations in the last year, investing for retirement security is (or should be) a long-term proposition. When a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999–2006 was analyzed, the average estimated growth rates for the period from Jan. 1, 2000 through Jan. 20, 2009, ranged from +29 percent for long-tenure older participants to more than +500 percent for short-tenure younger participants.

Recovery time and future stock market performance: This analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market declines. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

Near-elderly with very high equity exposure: Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities: Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 per-cent. As a result of the Pension Protection Act of 2006, many 401(k) plan sponsors appear to be offering lifecycle/ target-date funds, which automatically rebalance asset investments into more "age appropriate" allocations. Had all 401(k) participants been in the average target date fund at the end of 2007, 40 percent of the participants would have had at least a 20 percent decrease in their equity concentrations, and consequently, may have mitigated their losses, sometimes to an appreciable extent.

EBRI Issue Brief

Jack VanDerhei

Retirement

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________. “Five Ways to Fix Up Your 401(k) Plans.” 11 Wall Street Journal (1/31/09). partici tap th those in However, e e pant the qbui uity is la lestimated to d in t rgest cate ingh an eird/or home gory m no e s to pay (year ver recover difyin- g a en dow s d 20 im n (72.3 years). ulation mo credit car 07 account d del bal Si de that is m bt ances ilar results (Trejos a a gr beater le to n for the lower n d Malone, than $20 quantify th 2 0,0 008 e li 0on- kely impa 0 ). R ) e equity r x ep cent erienced ct of a market evi etu drn assumption ence a loss of mor report do ed wnturn are e by than Time for Recovery Figure 6 11 26 Additional analysis was performed for this topic in which the total contribution levels for the participant were held constant. Nessmith, William E., Stephen P. Utkus, Jean A. Young. Measuring the Effectiveness of Automatic Enrollment. Vol. 1. on eve 25 perc Fid found in elity nent. (2 tual Figur 00 re 9) sugg e tirement 7. ests that incom these e is a tren lengds thy process. Con may not be oustside of equently, att histori ecal norms. ntion a is typic ally focused on how a decline in the There has been considerable discussion as to what the current market downturn might do to retirement ages (Noor, The Impact of the Recent Financial Crisis Figure 8 on Jack VanDerhei is research Time Needed to Recover From 2008 401(k) Losses, director at EBRI. Any views expressed in this repor Using Various Equity t are those of the author and This will be available in a forthcoming working paper and will be linked to the following page: Figure 1 Figure 9 Vanguard Center for Retirement Research. Valley Forge, PA: The Vanguard Group, 2007. Figure 10 financial markets has affected the average defined contribution plan balances. The first section of this Issue Brief takes 2009). The decision-makin 401(k) Recovery Time, by Job Tenure and Salary: Equity Return Options g Return Assumptions, and a Non-Equity Return of process undertaken by individuals or households to dete 6.3 Percent rmine their retirement age(s) is an should n http://ebri.org/inde ot be ascribed to the officer x.cfm?fa=401kbalances s, tr ustees, or oth (Figure 8 cont'd. from previous page) er sponsors of EBRI, EBRI-ERF, or their staffs. Neither EBRI Change in Average Account Balances From 401(k) Recovery Time, by Job Tenure and Salary: Equity Return Options 4 Whil Although A policy e th qu e c it esti urr appears that, ent on that perio has re d of on f average, mos inancial peatedly sur uncert fatc a of t ed si inty for (Figure 9 cont'd. from previous page) he a nce t 4 ccou 0 h1 e (n k) p financial t ba articipants lance marke decr has resu eas t crisis is es welted i re whet ex nperi her th reform proposals ence e im d by pact thos wile wit l rangin be h agb from ove- Noor, M 401(k) Account Balances oina. “Losing the Glin Asset A t of th lle Golden ocation Years.” Distrib New York Times u tion of 401(k) (2/8/09). Participant Account the most recent information in the EBRI/ICI 401(k) database (year-end 2007) and uses employee-specific information 12 extremely complicated process and the Assuming a Non-Equity Return of actual impact of a sudden drop in e 6.3 Percent quity prices on retirement behavior will take nor EBRI-ERF 20 lobbies or takes positions on specific policy proposals. EBRI invites comment on this research. Jan. 1, 2008–Jan. 20, 2009, by Level of Account Balance, Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of 0 Percent Februar These losses a y 2009 • No. 326 re defined as the difference between actual year-end 2007 and estimated 2008 account balances. It should Assuming a Non-equity Return of 3.15 Percent 72.3 Years 5 modest modifi average disproport accou ionacations to outr tely bor Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of nt balances, ne by t most of the ight he loelimi wer-n pai policy concer atio d n of employees the curre ns in . Fint sy gures the stem, it is last f 8 and ew months 9 p repeat ossib hav the le that an e foc alys some used on t is in of t Fig he 0 Percent h ur ose close to pes erceive 4 and d l 5, imita but tions Balances to “Equity,” by Age: Year-end 2007 and 2008 as well Puzzangh as era, Jim. “Calls Grow to financial market indexes Overhaul 4 to esti01( mate the k) Retirement Plans. percentage cha ” Los Angeles nge in avera Times ge a (11/16/08). ccount balanc es among 21.8 million years to ana be noted that t lyze. However, his includes estimated contrib Among 401(k) Participants With Account Balances as of Dec. 31, 2007 as a convenient pro ution activity xy for participants (as well as other cash flows) for 2008 and with a vast majority of their no is n n-Socia ot limited to l Security Job Tenure Percentile of 401(k) Participants 19 Tenure By Jack VanDerhei, EBRI Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of 18 –10 Percent of the curr retirement a present Job Tenure result ent ge. Fi s for ea system may soon be at gure ch job 2 shows estimated chan tenure gro leas up ft partia or six ges i dif lly corr fn ere av nt erag ected salary gro e Percentile of 401(k) Participants 4 as a 01( res k) upi account ult of rec ngs: $balan 20, ent l 000 e ces for t gislative –$30,00 he sa and r 0, $me time 30, egulatory 000–$ perio 40,0 acti d 00, vity. show n Where the world turns for the facts Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of on U.S. employee benefits. –10 Percent investment losses. 401(k) pa Copy rticip right I ants, pres nforma ente tion: d by accou This report is cop nt balances as w yrighted e b ll as y thage e Emplo and ytenure ee Be (years) n for efit Researc the perio hd Institute (EBRI). It s January 1, 2008, through Trejos, Nancy. “Retirement Wreck: Are 401(k)s Still Viable for Saving?” Washington Post (10/12/08). retirement wealth in 50% 401(k) plans, Figures 4 and 5 show how long it might take for various 401(k) participants to (years) (“Equity” iSalary s defined as equit10th y funds + com 20th pany stoc30th k + the relevant 40th portion of Median balanced and t 60th arget dat 70th e funds) 80th 90th 20 Job Tenure Percentile of 401(k) Participants (years) Salary 10th 20th 30th 40th Median 60th 70th 80th 90th 6 As a result $40, in Figu 00re 0–$ ma 1, of 50, ybu b000, PPA an e t broken use $d 50,0 d t w do ithout perm h00 e s wn –u $60, bsequent by a 00 ig ssi 0, $ e an on but ci regulations 60, d te 000 nure. tati –$on 90,0 Focus for Q of the source is 00,in D and g IAs, the num ongreat thos requir er th e on ber o an $ ed. the ver 90, f 401(k 000. ge of ) sponsors r etirement adopting automatic (ages 56–65) makes it 13 12 Job Tenure Percentile of 401(k) Participants January 20, 2 16 009. (years needed to recover) recover th Some may qu e losses exper estion why any ienced 401(k) participan in 2008, as a functi t would choose to continue to invest in on of tenure with the current plan equities if the ass sponsor. umed rate of return Trejos, Nancy, and Brenna Maloney. “401(k)s, Retirement Savings and the Financial Crisis.” Washington Post (December 6, 1–4 60% Figure 4(years needed to recover) (years) Salary 10th 20th 30th 27 40th Median 60th 70th 80th 90th 1–4 enrollme clear that th nt pla 40 e $20,000–$30,000 % changes, to a ns appears to be increasin large ext — ent, g signific depen — d o antly. n th —e Figure 5 In addition to particip— ant's teincreasing the nure — with the — pla perce n sponsor. ntage — of Wit eligi hin — ble this work grer oup, — s (years) Salary 10th 20th 30th 40th Median 60th 70th 80th 90th were negative. Retirement 2008). While this wo and health benefits are at the heart of w uld certainly seem unlikely if the long-term assumptions were negative, this orkers’, employers’, and our nation’s analysis is attempting a 1–4 Reco $20,000–$30,000 mmended Citation: — Jack VanDerh — ei, “The Impac — t — of the Recent Financial Crisis on 401(k) — — — — 0.1 >90% 80–90% (years needed to recover) 70–80% 14 Time Needed to Recover From 2008 401(k) Losses,a Using Various Equity Return Assumptions 5–9 1–4 These findings $30,000–$40,000 show that, at least for — the median — results — , lower-— paid employees — will — have shorter — recovery times — than 0.3 Introduction (years needed to recover) Time Needed to Recover From 2008 401(k) Losses, Using Various Equity Return Assumptions to conduct sensitivity analysis on th partici average accou While th patin is pro g in vn the 401(k) plans, pr ides t balance cha detailed information nges vari e possible short-term consequences of evious ed between a onresearch the likely posi has s acctive o hunt own a strong p 1 percent activity during the various equity for the short-t ropensity recfor emp ent fi return assumpt enure nancia lind oyees ividuals ( l cri dsie ons. is, it does faulted less than into the notfive 1–4 economic security $30,000–$40,000. Founded in 1978, EBRI is — — — the most authoritative and objective source of — — — — — 0.3 1–4 Obviously, rec $20,000–$30,000 overy times will be a — function of wh — at futu — re market — returns — are assumed. Fi — gures 4 and 5 differ — — in their 0.2 Account Balances,” EBRI Issue Brief, no. 326, February 2009. VanDerhei, Jack. “The Impact of the Financial Crisis on Workers’ Retirement Security.” Testimony. U.S. b Congress. House 1–4 $40,000–$50,000 — — — — — — — — 0.4 1–4 30 $20,000–$30,000 % — — — — — —b — — 0.2 and a 6.3 Percent Non-equity Return Assumption 50% 10–19 10 their The retirem higher-paid co ent income unter pros parpects for ts, and in ma futur ney generat cases ther ions e iof re s a sign tirees ifica have been ntly shorter r model eco every time d extensively for t by EB he lowest-pai RI in recent d 1–4 14 $40,000–$50,000 — — — — — — — 0.0 0.5 1–4 The Impact of $30,000–$40,000 the R and a — ecent Financial Crisis 3.15 Percent — Non-equity Return Assumption — — — on — — — 0.4 system to rem years) to mor provide a long-term e 12 ain than with t a vi 25 percent loss ew he of default how 40 investm 1(kfor t ) pa ents chosen h rticipants have ose with te by the nure o fare fplan d more th in t spo he s n an 20 years. sor (Cho ystem. The i, Lai EB bson, Madr RI/ICI data ian ba , and Metrick, se previously 200 has 1 information on these critical, complex issues. assumptions f A similar type of analysis was Education and or the non Labor Commi -equity compo conducted by ttee. October 7, nents (bonds, m EBRI and re 2008. o ported in Trejos and Maloney (2 ney market, and stable-value i008); however, the only two nvestments) of future market 1–4 $50,000–$60,000 — — — — — — — 0.1 0.5 1–4 $30,000–$40,000 — — — — — — — — 0.4 Report availability: This report is available on the Internet at www.ebri.org 1–4 1–4 $40,000–$50,000 $50,000–$60,000 — — — — — — — — — — — — — — 0.1 — 0.5 0.6 category o years in an att f pae rticipants t mpt to more han the hi accurately ghest-paid. predict ho For w var exam iople, us cohorts of in Panel D Americans (5 perce 20–29 nt e will q likely uity retur fare n in ass re utirement. mption) o Res f Figure ults 8 scenarios modeled at that time were ones where (1) equity retu Panel A: Equity Rate of Return: rns immed –10 percent iately returned to historical norms and (2) all 401(k) 1–4 1–4 and shown th 2004; e r and e$40,000–$50,000 $60,000–$90,000 sults of co Nessmith, ntinu Utkus, Youn ous partici — — g, 2 pati0o07). — — n, an Althou d the se — — gh cond sectio balanc— — ed fu n o nds and mana f the — — Issue Brief ge — —d accou docume n— — ts ar nts the e also e 0.3 0.1 xfeasible tent to which 0.6 0.8 20% returns. Figure 4 assumes a nominal anPanel A: Equity Rate of Return: nual rate of return on the non- –10 percent equity portion of the portfolio of 6.3 percent, VanDerhei, Jack, and Craig Copeland. “Can America Afford Tomorrow’s Retirees: Results From the EBRI-ERF Retirement 10 1–4 1–4 $50,000–$60,000 $60,000–$90,000 — — — — — — — — — — — — — — 0.3 0.2 0.8 0.8 401(k) Account Balances participants immediately reduced their future 401(k) equity allocations to zero. 1–4 1–4 (6.3 percent Whil have ra e mnge uch o d n $50,000–$60,000 ffrom very o the n-equity r >$90,000 curreblea nt at etu k for su rn assumption tention — —bstanti in the al portio ), th financi — — e recover al ns of press has foc Percentile of 401(k) Participants — — tyh e U.S. time for — — popul used o the lowest-salary ation n 2 — — 008 (Van 4Der 01( category ($ k) per hei a — — nfd Copel ormanc 0.2 —20, and, e, give 000–$ 20 0.5 0.2 n th 30,0 03) to e sha 00 ) fairly with rp 1.3 0.8 40% EBRI focuses solely on employee benefits research — no lobbying or advocacy choices for satisfying the QDIA the 401(k) system has provided a sig regulations, nifican it a t positive average ppears tha Percentile of 401(k) Participants t the m groajority wth in account of plan sp bala onsors adopti nces over the ng au perio tomatic enrol d from January lment Security Projection Model.” EBRI Issue Brief, no. 263 (Employee Benefit Research Institute, November 2003). 1–4 while E Figure 5 BRI Employe cuts e >$90,000 Bene that fit R assumption in half, esearch Instit —ute Issue B — to riefa nominal (ISSN 08 —87 retu -137X rn o ) is — pu f 3.1 blis5 hed m perce — ontn hly t. by Five the E — dif mfploy ereee B nt panel 0.2 enefit R s showin esear 0.6 ch In g a stit ra ute, 1.3 nge 1–4 $60,000–$90,000 — — — — — — — 0.3 1.2 5–9 15 Job Tenure $20,000–$30,000 10th 20th — 30th — 40th — Median — 0.1 60th 0.4 70th 0.8 80th 1.3 90th2.2 1–4 $60,000–$90,000 — — — — — — — 0.4 1.2 10% 28 the decli positive hnigh e in est for 4 equ te 0nure was 1.4 years. i1 8 ties, it is (k) partici impo panrtant to stress ts with This nu contin mber increase uous covera that this type ge s of r throu for e virt tirem gua hout lly ent th all cate plan eir working is (o gories r at careers: Results until least should be it reaches 2.3 y ) a sug lon g ee ars for g st -term a those i n This may 1100 13t be d h S EBRI stand t. N uW e to a number , Suite 8s alone in em 78, Wa of factors, but in most cases shington, Dpl C,oyee ben 20005-4051, efits rese at $300 p it was either a functio er ar ych a ear or i s san inde included as pend pa n o rt e f a la of nt, nonprofit, and no a m rge co emberntribution- ship subscripti toon. - npa acco P rtisan e unt- riodi- 5–9 Job Tenure $20,000–$30,000 10th 20th — 30th — — 40th — Median 0.1 60th 0.4 70th 0.8 80th1.4 90th 2.3 1–4 >$90,000 — — — — — — 0.3 0.8 2.2 will 1, 2 opt 000, thro for the ug lif h Ja ecycle nuary /target-dat 20, 2009. e a A sam pproap ch. le of 2.2 million 401(k) participants who have been employed by the same VanDer By Jack VanDerhei, EBRI of returns are hei, Jack, Sarah Holde presented in both fi n, Craig Cope gures, on land, and Luis Alonso. “401(k) e for each of the following e Plan Asset quity return Allocation, Account Balances, and assumptions: –10 percent, –5 Loan 5–9 (years) $30,000–$40,000 — — —(years needed to recover) — 0.3 0.6 1.0 1.5 2.4 1–4 >$90,000 — — — — — — 0.3 0.8 2.4 21 cals postage rate paid in Washington, DC, and additional mailing offices. POSTMASTER: Send address changes to: EBRI Issue Brief, 1100 (years) (years needed to recover) 5–9 balance ratios or a very conse $30,000–$40,000 organization. It analyzes a rvative asset al — nd rep locati — o on. rts re— search data 0.0 without spin o 0.3 r unde 0.6 rlying a 1.0genda. All fin 1.5 ding2.5 s, 5–9 $20,000–$30,000 — — — — 0.2 0.6 1.2 2.3 5.3 signific investment the high ant por est-sa proposition. Pr tlary category ion of thesee workers’ prer v(greater ious analysis thane $90,000). twith t irement he E inco B RI/ICI 4 me coul 01 d (be k) dat replac abase ed by (Va40 nDe 1(k rhei, Hol ) accum dula en,tions Copelan when co d and mbine Alonso, d 13 5–9 plan 1–4 sponsor each year 30% Activity in 2006.” $40,000–$50,000 — from EBRI Issue Brief year-en — — d 1999 throu , no. 308; and — — (Figure 8 cont'd. from previous page) gh year-end — — ICI Perspec 20 0.2 — 06 tive, was Vol. 12, n used in 0.5 — o this a . 1 (Employee Benefit Research Institute 0.8nalysis. This — 1.2 “consistent sa 0.1 1.7 0.9 mple 2.5 ” 5–9 13th St. NW $20,000–$30,000 ,6 Suite 878, Washington, D —C, 20005-4 — 051. Copyright — 2009 by E— mployee Be0.2 nefit Researc0.6 h Institute. A1.3 ll rights reserv 2.5 ed. No. 326. 5.8 percent, 0, +5 percent, and +10 percent. In addition to showing the estimated recovery time for the median 0% 1–4 ——— — — — — 0.1 1.0 5–9 $40,000–$50,000 — — (Figure 9 cont'd. from previous page) — 0.2 0.5 0.8 1.2 1.7 2.6 5–9 16 $30,000–$40,000 — — — 0.0 0.4 0.9 1.6 2.7 6.0 whether on financial data, options, or trends, are revealing and reliable — the reason EBRI information is Table of Contents 5–9 with 2007) showed that Although Even though t Social Security (at least, the it wil $50,000–$60,000 l likely hey are a for those consistent take several years ssumed to be sufferi — Socially Se before th in curity bene 4 — ng relatively 01(k) pla e auto fits — nmatic enro s from he projecte avy lo 19 0.3 sses o 99 d llm under curr thr ent/Q n their equity inve ough 0.6 D 20 IA ent stat phe 06, in n0.9 omena r clusive, th utory provisio stments, esult 1.3 e av their no in ns). erage a situatio n- 1.8 accou equity n n wher t 2.7e a 5–9 5–9 and In $30,000–$40,000 vestmen — t Company Inst — — itute, August 2 — — 007). 0.3 — 14 0.0 0.8 0.41.5 0.9 2.4 1.7 4.1 2.9 th 9.5th 6.5 of 401(k) part 5–9 icipants ——— was created several years ago in t 0.3 he annual ana 0.9 lysis of EBRI 1.6 /ICI 401(k) 2.6 data to provide an 4.3 10.9 5–9 $50,000–$60,000 Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of — — — 0.3 0.6 0.9 1.3 +10 percent 1.8 2.7 5–9 individual in e $40,000–$50,000 ach tenure and equity — return combi — nation —, a distributio 0.2 nal analysis is 0.6 1.2 included to sh 2.0 ow th3.3 e 10 , 20 6.4 , the gold standard for private analysts and decision makers, government policymakers, the media, and 5–9 $60,000–$90,000 Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of 4 —EXEC —UTIV 0.2 E SUMMAR 0.5 0.8 Y 1.1 1.5 +10 percent 1.9 2.8 5–9 investments ar Introduc 10–19 tion$40,000–$50,000 ................................................................................................................... e assumed to b — e earning 6.3 p — — 0.7ercent per year — 1.7 — . This, coupled with estimated co 0.2 3.0 0.75.1 1.3 9.1 ntribution ac 2.1 ............................. 24.4 tivity of the 3.5 infinit6.9 y 3 10–19 —— 0.8 1.9 3.5 5.9 11.1 38.4 infinity balanc majority of the 401(k) assets are a e fell 8 -10% percent in the first thre utoma e yea tically re rs of this balanc deca ed de into but in "age a 2003 ppro increase priated " as 30set allocations percent. (especially for older 5–9 ________. “40 th th $60,000–$90,000 th1(k) Plan Asset th th Allocation, Account th— — Balances, and Loan Activity in 2007.” 0.2 0.5 0.8 EBRI Issue Brief 1.1 th 1.5 , no. 324; and 2.0 IC 2.9 I 5–9 $50,000–$60,000 — — — 0.4 0.8 1.4 2.2 3.6 7.3 estimate of Job Tenure changes in average annual account balances thatPercentile of 401(k) Participants was not biased downward by job turnover among 401(k) 30 , 40 20% , 60 , 70 , 80 , and 90 percentiles as well. For example, the value for the 70 percentile represents a time 5–9 the publi >$90,000 c. — 0.1 0.4 0.8 1.1 1.5 1.9 2.5 4.3 5–9 20–29 $50,000–$60,000 — 0.1 — 1.2— 3.0 — 0.4 6.0 0.8 13.1 1.5 72.3 2.3 infinity 3.8 infinit8.1 y employee and Job Tenure the employer, are sufficient to recoup the decrease in the Percentile of 401(k) Participants estimated 2008 account balance by the end of the Average Acc Equity Concentrations 20–29 ount Balance — s....................................................................................................... 0.1 1.5 3.7 7.8 20.7 infinity infinity ..................... infinity 4 Assuming that 401(k) accumulations were used to purchase nominal annuities at age 65, the EBRI/ICI 401(k) 5–9 >$90,000 — 0.1 0.4 0.8 1.1 1.5 2.0 2.6 4.7 5–9 Perspective, $60,000–$90,000 Vol. 14, no. 3 (Employee Benefit Research Inst — — 0.2 0.7 itute and Inves 1.1 tment Company Institute, December 1.8 2.7 4.1 8.7 participants), it would appear that in time this will certainly decrease the percentage of participants on the verge of 2 10–19 (years) $20,000–$30,000 Salary 10th —The Emplo 20th —yee Benefi 30th 0.1 t Research Institut 40th 0.6 e Median (EB 1.1RI) was founded in 1978. Its 60th 1.6 70th 2.2 80th 3.2 mission is to 90th 4.8 5–9 participants. $60,000–$90,000 — — 0.3 0.7 1.2 1.9 2.8 4.4 9.6 estimated recovery period. perio d long enough to include the recove Panel B: Equity Rate of Return: ry times of 70 percent of those in the tenur –5 percent e and equity return combination 10–19 Time for 401(k) losses f (years) Rec -2$20,000–$30,000 0% overy.............................................................................................................. rom the economic crisis: Salary 10th — Panel B: Equity Rate of Return: 20th 0.0 During 20 30th 0.1 08, major U.S. 40th 0.6 –5 percent equity Median 1.2 indexe 60th s wer 1.7 e shar 70th 2.4 ply negativ .......................... 80th 3.4e, with the 90th 5.2 7 5–9 Another topic that demonstr >$90,000 ates the — vulnerability 0.1 of 40 0.6 1(k) participants 1.1 to volatility 1.8 in 2.7 the equity ma 4.0 rkets deals 6.7 wit 66.9 h Accumulation Figure 3 sho 2008). w Proj s the ection Mo estimated cha del (Hol nge in a den and verage account bala VanDerhei, 2002) nc pre es am dicteong a d bas consiste eline median nt sample replace ofm 4ent rates 01(k) partici at pants by 10–19 $30,000–$40,000 —contribute to —, to encourag 0.3 e, and to enhanc 0.8 (years needed to recover) e the developmen 1.3 1.8 t of sound empl 2.5 3.3 oyee benefit 5.0 5–9 retirement with ext >$90,000 reme equity concentr — atio 0.1 ns similar to 0.6 what was ob 1.2 served in F 2.0 igure 10 2.9 . Howe 4.3 ver, this sh 7.5ould not infinity 17 Percentile of 401(k) Participants 10–19 $30,000–$40,000 — 0.0 0.3 0.8 (years needed to recover) 1.3 1.9 2.6 3.5 5.3 10–19 cohort (in ot EBRI explo h $20,000–$30,000 er wor res the breadth of emplo ds, at that valu —e only 30 percent 0.0 yee ben of 0.1 Percentile of 401(k) Participants that efits and related issues cohort would have rec 0.8 1.8 o3.1 very times gr 5.5 eater t12.6 han that infinity Equity Conc It should be noted that the particip en 0trations .......................................................................................................... ant and/or the employer may increase contributions to a higher percentage of ...................... 11 S&P 500 I 10% ndex losing 37.0 percent for the year, which translated into corresponding losses in 401(k) retirement plan Who we are 1–4 10–19 extreme equit $20,000–$30,000 $40,000–$50,000 y concentrations, especi — — ally for ol — — der empl 0.5 — oyees. Fi 1.0 — gure 10 sho 1.5 — ws for t 2.1 — he year-end 2.8 — 2007 EBRI 3.8 — /ICI 401 5.6 0.1 (k) 10–19 retirement ran age and tenu $20,000–$30,000 re ging from from Januar 51–69 y 1, perc 200 — programs and so ent, 0, thba rough sed on — January und public policy final 0.1 fi20, ve-year 2009. As 1.0 through objective avera ag result o e salary 2.1 f (“replacem tresear he c 3.6 o ch and ntinue ent rat educati d 6.6 parti e” m on. EBR cipation eani 16.7 I is the only n in g th the e infinity Vanguard. “Participants calmer than you'd think amid market turmoil” (12/02/2008). necessarily There has be be seen en considerable as a complete reme discussion r dy for i ecently as to nvestment risk for what the current workers, as the a market downt verage target-date urn might do to retirem fund acro ent a ss all ges. 1–4 10–19 Job Tenure $20,000–$30,000 $40,000–$50,000 10th 20th — — 30th 0.0 — 40th 0.5 — Median 1.0 — 1.6 —60th 2.2 — 70th 2.9 — 80th 4.0 — 90th5.8 0.1 10–19 -3$30,000–$40,000 0% -10% -10% — -5% 0.0 -5% 0.3 0% 0% 1.2 5%2.2 5% 3.7 10% 6.5 10% 14.5 infinity compensation in the fut Job TenureEBRI studie 10th ure. s the worl This co 20th ntingency is no d of health and retirement ben 30th t included in this analy 40th Median efit sis. s — issue 60ths such a 70th s 401(k)s, IRAs, retire 80th 90th ment Conclusion ................................................................................................................................................ 11 1–4 10–19 assets. But ho amount). This additional $30,000–$40,000 $50,000–$60,000 w individual det 401(k ail is im ) — — partici portan pat, du n— — ts are a e to t ffh e 0.5 e — cte large d byde the 1.0 gre — crisis e of diversity w is largely 1.5 — dete ithin 2.1 —rmined by each equit 2.7 — thei y return r account 3.6 — /job t ba enure lance, 5.3 0.2 10–19 $30,000–$40,000 — private, nonprof — it, nonpar 0.4 tisan, Washington, DC-b 1.3 2.4 ased organi 4.3 zation com 7.8 mitted exclusivel 19.7 y infinity to https://instituti database universe, the asset allocation di onal.vanguard.com/VGApp/iip stribution /site/insti of 401(k tutional/researchcom ) participant account mentary/article?File=NewsPartCalm balances to “equity” by age, as of percentage of 401(k) plans, the aver a worker age participant ’s final salary th inat th is e low replac est-te ed in nur re e ran tirement ge (six by to a nominal 10 years as annu oity purc f year-en hased d 2006) more with 401(k than ) as tripl sets). ed 1–4 10–19 (years) $30,000–$40,000 $50,000–$60,000 — — 0.0 — 0.6 —(years needed to recover) 1.1 — 1.6 — 2.2 — 2.9 — 3.8 — 5.6 0.2 10–19 $40,000–$50,000 < $10,000 — $10,000– 0.0 $50,000 0.6 $50,000–$10 1.6 0,000 $1 2.9 00,000–$200, 4.9 000 > 8.8 $200,000 23.2 infinity age co This is a (years) horts was reported to natural question to median 70th have dro ask after o median pped 32 percent bserving t 70th he acco median in unt 2008. Even m (years needed to recover) balanc 70th e declines median ore pro for ma blemat 70th ny of t ic for t median hh eose on parti 70th cipants i the vern g th e of e study 18 income adequacy, consumer-driven benefits, Social Security, tax treatment of both retirement and health 1–4 $40,000–$50,000 — — — — — — — — 0.3 10–19 10–19 References..................................................................................................................... $40,000–$50,000 $60,000–$90,000 — —public poli 0.2 — cy research 0.8 0.7and educat 1.3 1.7ion on econ 3.2 1.8omic securi 5.6 2.3ty and em 10.2 3.0plo ......................... yee b 32.5 3.9 enefit issu infinity es 5.6 . .. 19 age, a combination. It should be noted that the missing values nd job t enure. for one to four years of tenure reflect the fact that they had positive gains for 1–4 1–4 $40,000–$50,000 — — — — — — — — — — — — — — 0.1 0.0 0.80.4 10–19 10–19 0% $50,000–$60,000 $60,000–$90,000 percentile — — 0.0 0.3 percentile 0.8 0.8 percentile 1.4 1.6 2.9 1.9 percentile 2.4 4.7 3.1 8.2 percentile 19.3 4.0 infinity 5.9 year-en 1–4 d 2007 and w——— ith an estimate for 2008. Equity in t — 401(k) Account Balance his figure is —defined as the — percentage of — the 0.1 participant 0.8 ’s However, t his or h er acc hes oe base unt balanc line res e durin ults wer g this tim e pred eicated on t period, eve he n assumption th after factoring in at any the worker bear market for currently equities i participatin n th g i e early n a 401(k) 1–4 $50,000–$60,000 th — — — — — — — 0.1 0.4 10–19 10–19 retirement is t (especially th$50,000–$60,000 benefits, cost oh sat 2010 tar e conside >$90,000 red g manage et-dat to be — — e on t fu ment nh de s verge , worker a were reported to have decreased 0.0 0.5 of retire nd 0.9 1.1 employe ment); how 1.8 1.6 r attitude ever, for s, policy reform p 3.2 2.225 many percient (Laise, n 5.5 2.7 dividuals/hou ropo Jan 9.8 3.5sals, and p u sary 31, 2009). eholds, this 27.6 4.5 en swill ion asset infinity 6.9 s EBRI’s membership includes a cross-section of pension funds; businesses; trade associations; Endnotes................................................................................................................................................... 20 2008 (even at the 70 percentiles). 1–4 5–9 $50,000–$60,000 — — — — — 0.3 — — 0.7 — 1.1 — 1.7 — 2.6 0.1 4.50.4 10–19 10–19 $60,000–$90,000 Up t>$90,000 o Age 35 Up to Age 35— — Age 36–45 0.3 0.6 Age 36–45 1.2 1.2 Age 46–55 2.2 1.8 Age 46–55 3.6 2.3 Ag 5.8 2.9 e 56–65 10.2 3.7 Age 56–65 26.1 4.8 22infinity 7.6 5–9 ——— 0.3 0.7 1.2 1.8 2.7 4.8 1–4 401(k) funds $60,000–$90,000 held in equity funds, — company stock, and — —the equity — portion of — balanced a — nd/or tar —get-date 0.2 funds. Th 0.6e 20 or more plan portion o Endnotes woufld th co is deca $20,000–$30,000 ntinue Sources: 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2008 an de to an be d t ohe re ffered cent — a 401(k financial mark ) — plan at each et c 0.4risis future job. I . Even th 1.0 e long-tenure i f it is1.8 assumed t n 2.6 divi hat the duals work d 2009 account (21 to 30 years at 3.8 er woul 5.4 d have work) only an 8.8 10–19 $60,000–$90,000 and funding. There is wi — labor un despread ions; h 0.3 ealth recog car 1.3 e prov nition that if employee be iders and insur 2.5 ers; 4.1government org ne6.7 fits data exist, EBRI kno anizations; 12.5 and service firms. 40.0 ws it. infinity Impact varies by account balance: This Issue Brief estimates changes in average 401(k) balances from Jan. 1, 1–4 19 depen 10–19 d on far $60,000–$90,000 more t — han just the — — 401(k) 0.6 balanc — es wit 1.3 — h the current — 2.1 employer. St — 3.0 ill, the — question 4.3 — of ho 6.6 w lo 0.2 ng it will 13.5 take 0.6 20 or more 10–19 $20,000–$30,000—— — — 0.6 Equity Return and Percentile Distribution 0.4 1.4 1.2 2.3 2.0 3.3 2.9 4.7 4.2 7.3 6.1 15.8 9.9 10–19 For example, in pa >$90,000 nel D of Figure 4 (+5 — percent 0.8 equity 1.8 return assumpti 3.2 on), t 5.2 he med 8.4 ian time to r 16.6ecovery for 156.7 an infinity balances: EBRI estimates. The analysis is based on all participants with account balances at the end of 2007 and contribution information for that year. Only a portion of the 401(k) participants in the EBRI/ICI 2007 2008 2007 2008 database contain salary in 2007 2008 form2007 ation. Therefore, the average 2008 1–4 >$90,000 — — — — — — 0.2 0.4 0.9 20 or more $30,000–$40,000 — — 0.6 1.2 2.0 2.8 3.9 5.4 8.3 10–19 >$90,000 — 0.9 2.1 3.8 6.0 10.3 23.2 infinity infinity figure shows that 27 percent of young 401(k) participants (those 35 or younger in 2007) have 90 percent or more of 1–4 Moreover, tar had a average 20–29 n av cha erage ga nc ge of et-date fu >$90,000 — b in o eing f at of nds least fe are red a 0.129 perc likely — 401 to be viewed (ent k) 1.0 p dur l— an at ing that futby s u 2.1 — re j period. oo me 4 bs, the inco 01 — 3.3 (k) participants me replacem — 5.1 as ent rates a homogenou — 8.0 decr 0.2ease to a s produ 14.7 0.4 ct—bu range of 63.2 t, in 0.9 21– 20 or more 200 20–29 8, to Jan. $30,000–$40,000 20, 2009, — using the EBR 0.1 — I/ICI 40 — 1.11(k) data 0.6 2.4 base of mor 1.4 3.9 e than 2 2.2 th1 mi 6.0llion3.1 partici 9.7 pants. 4.3 Not surprisin 18.76.0 g214.6 ly, how 9.3 20 or More $20,000–$30,000 — — 0.5 1.7 3.9 7.8 26.6 infinity infinity 401(k) participants to recover their losses in the current market has been the topic of much speculation, and the third 5–9 1 recovery times for these figure $20,000–$30,000 s may be slight — ly di — fferent fro — m those provided in Figures 4 — 0.1 percentil 0.3 e and 5. is zero (no 0.6 recovery time), 0.9 du 1.4e 20 or more indivi dual in th $40,000–$50,000 e highest job tenure — category 0.2 is 1.8 years. 0.9 However, 1.7 the 10 2.5 3.3 4.5 6.1 9.1 20 or More $20,000–$30,000 — — 0.6 2.1 4.7 11.1 88.2 infinity infinity Ibbotson (2002) data were used to construct the model. 5–9 $20,000–$30,000 Source: Author's calculations based on year-end 2007 data from the EBRI/ICI Participant-Directed Retirement Plan Data Collectio — — — — 0.1 0.3 n Project. 0.6 0.9 1.5 20 or more $40,000–$50,000 —EBRI’s work advances knowledge and unders 0.2 1.0 1.9 2.7 tanding of emplo 3.7 4.9 yee benefits and their 6.6 9.9 20 or More their EBRI delive 401(k) a $30,000–$40,000 ssets in e rs a stead quities (broadly y stream of invaluable research and anal — de Panel C: Equity Rate of Return: fine —d). Anoth 0.8 er 13 percent 2.1 of this co 0 percent 4.4 hort h ysis 9.2 ave 80–90 31.8 percent of their a infinity ssets infinity fact, th 26 the re perc cent ey are ent. fin While t anot. Among 2010 fu ncial mark his latt et l er o scenario is c sses affect nds at in l Panel C: Equity Rate of Return: eerdividual ast a year tainly far too 40 ol 1(k d, th pessi ) acco e most co mistic to unt bala nservative tar be corr nces is stron 0 percent ect, th g ge disparity et-date fu ly affected by nd bethad t wh een e siz 26 percen th ee two of a t of sets of 5–9 $30,000–$40,000 — — — — 0.2 0.5 0.7 1.0 1.5 20 or more 20 Sources: $50,000–$60,000 a — 0.1 0.9 1.6 2.3 3.2 4.2 5.8 8.4 20 or More section of the $30,000–$40,000 Issue Brief provides detail — ed distributio — n 0.9 al analysis 2.6of the "recov 5.8 ery tim 13.4 e" for partici 143.3pants infinity under a v infinity ariety to the fact tha Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. t at least 10 percent of the 401(k) participants in this category were estimated to have no losses in 5–9 2 Participants with salaries less $30,000–$40,000 than $20,000 — — were exclud —ed in an attempt t 0.0 o deal with part-time employe 0.2 0.5 0.7 es. 1.0 1.5 20 or more $50,000–$60,000 — 0.2 1.0 1.7 2.6 3.5 4.6 6.3 9.3 20 or More Figures $40,000–$50,000 — importance to 0.2 the nation’s econo 1.5 my 3.4 among policy 6.7 makers, 15.3 the news 222.7 media, and infinity the public. It infinity Percentile of 401(k) Participants VanDerhei, Holden, Copeland, and Alonso (2008). 2007: Tabul EBRI ations from yearpublications -end 2007 data from in Eclu BRI/Ide in-de CI Participant-p Dith cove rected Ret Percentile of 401(k) Participants irem rage of key issues a ent Plan Data Collection Project.nd tren The analysisd iss bas ; summ ed on actarie ive s of research 5–9 $40,000–$50,000 — — — 0.1 0.4 0.6 0.8 1.1 1.5 20 or more allocated in participant's thi $60,000–$90,000 account s fashion, balanc and another e. Those — w 1i1 th percent low acco 0.3 have unt 1.0 7 balances r 0–80 perce 1.8 elativ nt allocated to e to co 2.5 ntributi eq 3.3 ons ex uities. peri 4.4 enced minimal 5.9 8.6 20 or More assets in stocks as of th results demo$40,000–$50,000 nstrates the im e thir portance d quarter — of of co 2ntinue 008, 0.2 accord d partici 1.8 ing to I pation bbotson 4.2 in a 40 1 Associates, bu (k8.7 ) plan thro 24.7 ughout t the most an infinity em agployee gressive ha infinity ’s worki d tng w infinity o- 15 th 5–9 of future retur $40,000–$50,000 n assumptions for both — equity and non — -— equity compon 0.1 ents of th 0.4 e 4010.6 (k) portfolio. 0.9 Results are 1.2 displayed 1.6 20 or more 21 participant $60,000–$90,000 s with account balances at the end of — 2007. 0.3 1.2 2.0 2.7 3.7 4.8 6.4 9.3 20 or More 2008 and the $50,000–$60,000 90 percentile is es —does this b timated t 0.2 oy take conducting 4.9 y 1.3eaand p rs befor ublishing policy re 3.1e their 40 6.11(k) sear bala 13.4 ch, analysis, nces are 62.9 exand pecte special reports on dinfinity to be equal infinity to Job Tenure 10th 20th 30th 40th Median 60th 70th 80th 90th 5–9 3 Figure 1, Change in Averag There are What we do several potential explanations fo $50,000–$60,000 e Account B — alances From r this result, but the most likely is that — —Jan. 1, 2008–Jan. 20 0.2 0.4 , 2009, by Level of A higher- 0.6paid individuals 0.9 ccount Bal have a 1.2 higher ance, 1.6 ratio 20 or more Job Tenure >$90,000 finding 10ths and policy develo 20th — 0.8 30th pments; timel 1.5 40th y factsheet 2.3 Medians on hot topics; 3.2 60th 4.2 regula 70th r5.5 updates on legi 80th7.6 slat 90th 13.4 ive and 20 or More $50,000–$60,000 — 0.2 1.6 Figure 3 3.8 8.0 21.4 infinity infinity infinity investment losses that were typically more than made up by contributions: Those with less than $10,000 in account For 401(k) participants in the highest-in 2008: Author's projections based on year-end 2007 dat come a from quartile, the median replacem EBRI/ICI Participant-Directed Retirement Plan Dat ent rate a Collec decrea tion Project. sed by 3.7 percentage points if thirds of career. its assets in stocks (Laise, November 13, 2008). 20 or more 5–9 $50,000–$60,000 >$90,000 — — 0.9 — 1.7 — 2.6 0.2 3.5 0.4 4.6 0.7 6.1 0.9 8.4 1.2 15.6 1.6 20 or More $60,000–$90,000 — employee benef 0.4 its issues; holding educational br 1.7 3.7 7.0iefings for EBRI memb 15.7 109.7 ers, congressional and infinity infinity both as (years) a function of job tenure alone, and as job tenur(years needed to recover) e and salary together. of account balances to annual contributions than do their lower-paid counterparts. This may be the result of constraints 5–9 their Ja (years) nuary $60,000–$90,000 1, 2008, level (in nomina — l terms). — 0.2 (years needed to recover) 0.4 0.6 0.8 1.0 1.3 1.7 20 or More $60,000–$90,000 regulatory development — s; comp 0.5 rehen 2.1 sive refere 4.5 nce resou 9.3 rces o 26.5 n benefit pro infinitygrams an infinityd woinfinity rkforce Among 401(k) Participants With Account Balances as of Dec. 31, 2007...............................................5 Although many asset allocation models and/or financial advisors may suggest that extreme concentrations in equities the market downturn occurred at the beginn Change in Average Ac ing of the care count Balances Among a Consistent Sample of er. The decrease was estimated to be 10.4 percentage points if it 5–9 balances had $60,000–$90,000 Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of an average growth o — f 40 percent — during0.2 2008, since 0.4 contributions 0.6 had0.8 a bigger im 1.0 +5 Percent pact than 1.3 investment 1.7 20 or More >$90,000 — 1.1 3.0 6.2 13.2 58.4 infinity infinity infinity federal agency staff, and the news media; and sponsoring public opinion surveys on employee 1–4 — — — — — — — 0.10 0.64 1–4 ——— — — — — 0.1 0.7 5–9 imposed by IRC Sec. 402(g), Time Needed to Recover From 2008 401(k) Losses,* Assuming Equity Return of >$90,000 plan-sponsor re — actions to potential ADP/ACP 0.1 0.3 0.6 nondiscrimin 0.8 ation testing, or 1.0 1.2 +5 Percent plan constraints for 1.6 2.2 20 or More >$90,000 — 1.4 3.8 8.5 22.7 infinity infinity infinity infinity issues; and major surveys of public attitudes. 5–9 took place at the middle of the career. If >$90,000 — the market downturn took place at the 0.1 0.3 0.6 0.8end of t1.0 he career, the 1.3 estimated decrease 1.6 2.3 for the losses. However, those Job Tenure young cohorts woul 401(k) Participants, b with d be more than acce benefit issues. ptable $200,000 in , fe y Age and Tenure, Jan. 1, 2000 Through Jan. 20, 2009 w EBRI’s Ed woul acco d reunt co ucmmend it ation and Re balanc Percentile of 401(k) Participants es h foad an se r those a arch avera Fund pproa g (EBRI-ERF) performs e loss of mor ching retiree me thnt. Neverthe an the char 25 perc itable en let. ss, , EBRI is c Moreover, th 5–9 urren es tly conductin e simulation — g r an a e— sults wer nalysis of e ba — sed on the assumption that t target-date 0.23funds for0.56 defined contri he ra 0.92 nge of bution ra plans tes of r 1.36. Th eturn is pr h 1.92 oject will istorically observed incor 2.93 porate 5–9 ——— 0.2 0.6 1.0 1.4 2.0 3.0 10–19 $20,000–$30,000 — — — 0.5 0.8 1.1 1.4 1.8 2.4 One of the highly compensated employees. questions that co Time Needed to Recover From 2008 401(k) Losses,* Assuming an Equity Return of mes up repeatedly is why so many 401(k) participants close to retire–5 Percent ment age have done Job Tenure Percentile of 401(k) Participants The choice between the two EBRI meetings non-equity r present an eturn assumpti d explore is ons (nam sues with ely, thou Figure ght leade 4 or Fi rs from all se gure 5) appear ctors. s to be of relatively 10–19 $20,000–$30,000 — — 0.1 0.5 0.8 1.1 1.5 1.9 2.5 Figure 2, Change in Averag was 17.7 percent. These perc Time Needed to Recover From 2008 401(k) Losses,* Assuming an Equity Return of entage point d e Account Baecreases for this gr lances From Jan. 1 oup were based on a medi , 2008–Jan. 20, 2009, by Age and Tenure, Among an replacement rate of 67.2 percent –5 Percent educational, and scientific functions of the Institute. EBRI-ERF is a tax-exempt organization 10–19 10–19 ——— — 0.490.5 1.031.1 1.57 1.7 2.15 2.3 2.84 3.0 3.80 4.0 5.70 6.1 (years) Salary 10th 20th 30th 40th Median 60th 70th 80th 90th 10–19 the 2007 asse $30,000–$40,000 t allocation information in — Figure — 10 shows 0.2 Figure 7 that al0.6 most a quarter 0.9 (22 percent) of the o 1.2 1.5 ldest 1.9 401(k) 2.5 in th three e Unit distinct, ed States wou but interrelated, phases. Th ld be replicated on a stochasti e first phase c basis will provi for f de uan ture yea empirical rs. Historically analysis of the use of tar (and in the base get line -dat case of e fund s 22 Job Tenure Percentile of 401(k) Participants (years) Salary 10th 20th 30th 40th Median 60th 70th 80th 90th 10–19 so poorly with $30,000–$40,000 respect to changes — in account —balances i 0.2 n 2008. T 0.6 he conventional 0.9 wisdom has lo 1.2 1.6 ng held t1.9 hat as 401(k 2.5) of final income, assuming a It should be n oted that the results in this figure are not EBRI regula regular stoc rly provides hastic simulation of equity returns. congressiondi al testimony rectly comparable with Figure 4 in Va , an d briefs policymakenDerhe rs, mem i (2008). In the ber organizations, minor consequence as long as the equity rate of return assumption is non-negative (i.e., either 0, +5 or +10 percent). Impact Job Tenure 20–29 20–29 varies by a 401(k) Partici — g —e and job tenure pants 0.06 With Ac 0.1supported b count Ba 0.82 : 401(k) pa 0.9 y co lantributions nces as of De 1.56 rticipants on th 1.7 and g Percentile of 401(k) Participants c. 31, rants. 2.32 2.6 e verge o 2007........................................................... 3.18 f 3.5 retirement 4.26 4.7 (ages 56–5.85 65) ha 6.4 d avera 9.01 9.9 ge 5 (years needed to recover) a 10–19 References $40,000–$50,000 — — 0.4 0.7 1.0 1.4 1.7 2.1 2.6 Figure 2 600% participants (ages 56–65 in Time Needed to Recover From 2008 401(k) Losses, 2007) had 90 percent or more of thei (years needed to recover) r 401(k) assets in Using Various equities. Another 10 percent had 10–19 the mo in 4 (years) 01(del), a k) plan $40,000–$50,000 b s. The out t Salary w second o-thirds of the time, phase 10th —will foc equity u 20th s on a — retur conce 30th 0.4 ns in ptuany al analysis 40th given 0.7 year are between of the desirabl Median 1.1 60th 1.4 e constructio -7 perc 70th 1.7 enn t and 33 of tar 80th 2.1 get percent per -date 90th 2.7 earlier publicatio 4 n,and the medi equity concentratio a on employe ns were measured fo r benefits. r the consistent sample of participants defined earlier. By participants approach retirement age, they should start to gradually reduce their equity allocations, although the 1–4 $20,000–$30,000 — — — — — — — — 0.1 10–19 changes durin (years) $50,000–$60,000 g this Salary period that varied 10th — bet Panel D: Equity Rate of Return: w 20th — een a positiv 30th 0.4Figure 2 e 1 percent 40th 0.7 for short-te +5 percent Median 1.0 nure 60th 1.3 individuals 70th 1.6(one to 80th four y 2.0 ears with 90th 2.5 However, under The EBRI/ICI Participant- a negative Directed Retirement Plan Data equity rate Panel D: Equity Rate of Return: of return assumption, some i Collection Project i nte +5 percent resting di s the largest, most representative repository fferences take place in the right han of d Choi, James J., David Laibson, Brigitte C. Madrian, and Andrew Metrick. "For Better or For Worse: Default Effects and 401(k) b 1 10–19 1–4 $50,000–$60,000 $20,000–$30,000 — — 0.0 — 0.4 — 0.8 — (years needed to recover) 1.1 — 1.4 — 1.7 — 2.0 — 2.6 0.1 80–90 percent in equities, a Equity Return Assumptions and a Non-Equity nd 11 percent had 70–80 percent in equities. Return of 3.15 Percent year. definition, participants would need to be in t accumulation Howev princi er, duri ples for defi ng 2008, major U.S. e ned contribution hq e plan at least uity in pla dex n pa es w rtic seven years to be in the consistent sample. This will provid eipants, re sharincl ply u ne din gative, g the exte withnsion of the S&P these 500 I pri ndn ex losin ciples into g 37. the e 0 EBRI issues press releases on newsworthy developments, and is among the most widely quoted 1–4 10–19 $30,000–$40,000 $60,000–$90,000 — — 0.2 — 0.6 — 0.9 — (years needed to recover) 1.2 — 1.4 — 1.7 — 2.1 — 2.6 0.3 Percentile of 401(k) Participants Figure 3, Change in Averag information about individual 401( appropriate asset allocations Change in Average Account Balances From Jan. 1, 2008–Jan. 20, 2009, by Age and for t e Account B k) plan part hEBRI Issue B ose ona tlances Among icipant accounts. As of December he ver riefs geare period of Percentile of 401(k) Participants retirement a icals providing exp Consi wil stent l, in Sample of 40 many mo 31, 2007, the EBRI/ICI database includes ert evaluati del1(k) Particip s ons of emplo , take into co yants, by Age ee benefit issues and nsideration th and e the current Savings Beh employer) to m avior." Pensio ore than a n Research Co 25 percent loss fo uncil Working Paper r those with . PRC WP 2002- long tenure 2. Philadelphia, PA: Pension R (with more than 20 years). esearch tail of the recovery time distributions. For example, in Panel A (–10 percent equity rate of return) of Figure 4 (6.3 per- 1–4 10–19 1–4 $30,000–$40,000 $60,000–$90,000 $20,000–$30,000 — — — 0.2 — — 0.6 — — 0.9 — — 1.2 — — 1.5 — — 1.8 — — 2.1 — — 2.7 0.3 0.2 20 Tenure significant bias in the equity concentrations for the youngest cohorts. 1–4 10–19 1–4 $40,000–$50,000 $20,000–$30,000 >$90,000 sources on employee be — — — 0.4 n — — efits by all media. 0.8 — — 1.1 — — 1.4 — — 1.6 — — 1.9 — — 2.3 — — 2.9 0.4 0.2 decumu perce Job Tenure nt for lation th e year. phas 10th e, Fi by taki xed-income i ng i 20thnto acco trends, as well nvesu t 30th ments nt plan as cr far demo e itical analy d 40th m guch raphics be ses of tter Median . The dur emplo third phase ing t yee benefit po his 60th perio will d licies an inclu , with 70th de the d proposals. an Barc empirical lays Capital 80th EBRI Notes analy U. s 90th is of the is a S. statistical infor Job Tenure mation about 21.8 million 10th (Infinity) 20th 401(k) plan participants, in 56,23 30th 40th Median2 employ 60th er-sponsored 401(k) plans, holding $1.425 70th 80th 90th Tenure Council, The Wharton School, University , Jan. Tenure, Among 401(k) Participants With Account Balances as of Dec. 31, 2007 1, 2000 Through Jan. 20, of Pennsylva 2009 ..................................................................................... nia, November 9, 2001. 6 1–4 10–19 expected lon Our $40,000–$50,000 gevity of >$90,000 the individual — — (or join0.4 t lon — gevity o 0.8 —f the househo 1.2 — ld). Th 1.4 —ere is ce 1.7 — rtainly evi2.0 — dence of this 2.4 0.0 behavior on 3.0 0.4 1–4 $30,000–$40,000 — — — — — — — — 0.3 (years) cent no 500% n-equity rate of return), the median participant with 20–29 years of tenure is assumed to need 6.0 years to 23 Tenure 1–4 20 or more $50,000–$60,000 $20,000–$30,000 — — — — 0.3 — 0.7 — 1.2 — 1.6 — 2.0 — 2.5 0.1 3.3 0.5 1–4 Target-date fu $30,000–$40,000 nds with automatic re — balancing — and a “glide pat — h” ensur — ing — “age-appro —priate” asset a — llocation a — re likely 0.4 (years) 18EBRI directs members and other constit (years needed to recover) uencies to the information they need, and undertakes new Short-term vs. lon The Dep (years) artment of Labor issued final reg g-term: Whilmonthly e much u period lations for qualifie of theical providing cu focus has bee (years needed to recover) d default inv nrrent information on a variety on market fl estment altern uctuatioatives (QDIAs) on October 24, 2007, ns in th of employ e last year, i ee bennefit topics. vesting for trillion in assets. The 2007 EB 7 30% RI/ICI database covers 45 percent of the universe of 401(k) plan participants, 12 percent of 1–4 20 or more choice o Aggregate f tar Bo g $50,000–$60,000 $20,000–$30,000 nd I et-dat nde e x fun gain ds iby plan s ng 5.2 — — per ponsors and correl cent an — —d three-mo 0.3 —ate nth T s wi-th e bills 0.8 — m gai ploye ning 1. e 1.3 — de4 mograp perce 1.7 — nhics and p t. 2.1 —lan desig 2.7 0.1 n variable3.4 0.5 s. 1–4 $40,000–$50,000 — — — — — — — — 0.5 16 (years) ________. "Saving For Retirement on the Path of Least Resistance.” Originally prepared for Tax Policy and the Economy 2001, average. However, the distributional analysis of this equity concentration may be more skewed than typically thought, 1–4 20 or more $60,000–$90,000 $30,000–$40,000 — — — — 0.4 — 0.9 — 1.3 — 1.7 — 2.1 — 2.5 0.2 3.2 0.7 1–4 recover their $40,000–$50,000 2008 losses, whereas t — he same in — dividual — in Figur — e 5 (3.15 — percent rate of retur — — n) would 0.0 need 7.8 years. 0.5 1–4 ——— — Tenure — — — 0.1 0.6 1–4 resea — rch on a —n ongoi EBRI’s ng ba — Pension Inv sis. es — tment Report — provides detailed fin — ancial — information on th 0.1 e universe of 0.6 to provide, in to become mu tech more r alia, employers wh common aft o adop er full t automatic enroll implementationment plans a s of the Pension Protect afe harborion froAct of m fiduciary risk 2006 (PPA), when selecting an with an expected 1–4 20 or more plans, and 47 $60,000–$90,000 $30,000–$40,000 percent of 401(k) plan assets. The EBRI/ICI project — — — — 0.5 — is unique because of its inclusion of data provided b 0.9 — 1.4 — 1.8 — 2.2 — 2.7 0.2 y a wide 3.3 0.7 1–4 retireme publications nt sec $50,000–$60,000 urity is (or should be —) a long-term — proposit — ion. Whe —n a c 6– onsistent sam 10— 11–20— ple of 21 2.2 –30 milli — on part 0.1icipants who 0.6 Figure 4, Time Needed to 16 Recover From 2008 401(k) Losses, Using Various Equity Return Assumptions and a The additiona updated draft: l insights gene July 19, 2004. rated by this research should assist in providing a more informed asset allocation for those 1–4 20 or more $40,000–$50,000 >$90,000 th — — 0.1 — 0.7 — 1.1 — (years) 1.5 — 1.9 — 2.3 0.2 2.7 0.5 3.4 1.1 1–4 $50,000–$60,000 — — — — — — — 0.1 0.6 since many 5–9 401(k) partici——— pants nearing retirement have 0.2 high equity con 0.5 centrations. A 0.8 ccordin 1.1 gly, the last sectio 1.6 n 2.2 of this 5–9 — — defined b —enefit, defined 0.2 contribution, 0.5 and 401(0.8 k) plans. EBRI 1–4 1.1 Fundamentals of Employee 1.5 2.2 1–4 20 or more Moving to investment for the $40,000–$50,000 participants who fail to elect their own investme 60 >$90,000 EBRI maintains an percentile in th — — e sam d analy e panel 0.2 — zesfor t the mo h0.8 e —hi st comp ghest-t nt. Sec. 404(c)(5 1.2 — e re nur hen e c si ategory i ve databa 1.6 —)(A) of ER ncrea se 2.0 —ISA pr ses the of 401(k) ovides th dif 2.4 0.2 -f type ereat, for purposes of n prog tial su 2.8 0.5ram bstanti s in the ally 3.4 1.1 1–4 variety of plan $60,000–$90,000 recordkeepers and, therefor — e, portrays the a — — ctivity of participants — — in 401(k) — plans of varyi — ng sizes—from very 0.3 0.9 increase had been in with aut the omatic enro same 401 llment for (k) plan s 40 p1 o( nk) plans a sor for the sev nd the e atte n years nda from nt interest 1999–2006 in qual was analyzed, t ified default investment he average es altertimated natives It should be emphasized that while older employees have average equity allocations that are lower than their younger 5–9 20 or more6.3 Percen $20,000–$30,000 $50,000–$60,000 t Non-equity Ret — — urn Assump 0.1 — tion0.6 — ....................................................................................... 1.1 — 1.4 0.1 1.8 0.4 2.2 0.7 2.6 1.1 3.2 1.7 8 1–4 10–19 $60,000–$90,000—— — — 0.5 —0.9 — 1.3 — 1.8 — 2.2 — 2.8 0.3 3.70.9 nearing retirement age. 400 10–19 % 14 — — 0.4 0.9 1.3 1.7 2.1 2.7 3.6 Fidelity Investments. Impact of Market V Benefit Programs olatility on Particip offers a straightforward, b ant Exchange thBeha asic exp vior, Bu lan ild ation of ing Fu tu emplo res: Impact of M yee benefit programs in arket 5–9 20 or more 20 $20,000–$30,000 $50,000–$60,000 % — — 0.1 — 0.7 — 1.1 — 1.5 0.1 5–9 1.9 0.4 2.3 0.7 2.7 1.1 3.3 1.8 1–4 Issue Brie Sec. 404(c)(1) large corporations to small businesses—wi f presents distributi of ERISA, a par >$90,000 world. Its co tonal an icipant in an mputer — alysis for all simul th in a variety of in dividual accoun — ation analy age coh 1– — 4svestmen eorts s t plan shall be 5– on So 9but t — option 1focus 0–1 cial Secu 9 e s. s primar treated 20— –29 rity reform as exercising control ily o 30 or Mor — n the and retireme e sign0.2 ificant percenta over the assets i nt income a 0.6 ge d of equa 1.6 n the cy 23 24 (13.1 years in Figure 4 vs. 20.7 years in Figure 5). Results for the 70 percentile in each case show what is likely to 5–9 $30,000–$40,000 — — — — 0.3 0.5 0.8 1.2 1.8 1–4 20 or more (QDIAs growth 20–29 rates ). Base $60,000–$90,000 for the d on >$90,000 per un — pu iod f blis rom Jan. hed EBRI 0.1 — — 1, 2 rese 000 t 0.2 — arch, 0.8 hrough Ja the 0.7 — aver 1.4 n. 2 age 0, 2 1.2 eq — 00 uity al 1.9 9, range location for 1.5 —d from 2.5 29 tar 1.9 —perc get-dat 3.1 ent 2.2 0.2 e for fun long-te ds 3.9 design 2.7 0.6 nureed o for lder 5.13.3 1.7 counterparts (and hence are thought by many to be less vulnerable to negative returns in the equity markets), their 20–29 — 0.1 0.7 1.3 1.8 2.3 2.9 3.7 4.9 the private and public sectors. The EBRI Databook on Employee Benefits is a statistical 5–9 Volatility $30,000–$40,000 , December 2008. — — — 0.0 0.3 0.5 0.9 1.2 1.9 5–9 20 or more $20,000–$30,000 $60,000–$90,000 — — 0.3 — 0.8 — 1.2 — 1.6 0.1 2.0 0.5 2.3 0.9 2.8 1.7 3.3 3.2 5 account with respect to the amount of contributions and earnings which, in the abse 10–19 nce of an investment election by the are unique. those “near-elderly” work 12 ers between 56 and 65 who have equity concentrations cfar beyond what are often thought to 5–9 $40,000–$50,000 — — — 0.2 0.4 0.7 1.0 1.4 1.9 5–9 20 or more For purposes of this analysis, investment ret $20,000–$30,000 >$90,000 — — 0.6 u — rns were proxie 1.0 — d by one of the following three 1.4 — 1.8 0.2 c 2.2 0.5 index returns: S&P 5 2.6 1.0 3.1 1.8 00 Index, 3.9 3.3 result for those with either very large equity allocations at the end of 2007 or those with low contribution-to-account- participants to more than 500 percent fo Panel E: Equity Rate of Return: r short-tenure younger partic+10 percent ipants. Figure 5, Time Needed to Recove referen r From ce work o 2008 401(k) Lo n employee ben sses, efit pr Using Variou ograms and work force-related issues. s Equity Return Assumptions www.ebri. and org a 5–9 individuals in t $40,000–$50,000 he 56–65 age range — was Panel E: Equity Rate of Return: 51.2 percent — at y — ear-end 2007. 0.2 +10 percent That 0.4 would i0.7 mply that approximately 1.0 1.4 43 percent 1.9 20 or more 5–9 average accou http://img.en2 $30,000–$40,000 nt ba >$90,000 lances 5.com/Web/Fid are sign — — ifica elityRetirementSe ntly larger 0.6 — and th 1.1 rvices/MV%20part%20beh —erefore have 1.6 — more to lose 1.9 0.3 avior%20Final%2012-11-08_6.pdf in2.3 0.7 a significant 2.7 1.2 downturn. 3.2 1.9 For 4.0 3.4 participant, are invested by the plan in accordance with regulations prescribed by the secretary of labor. The three types of CHECK OUT EBRI’S WEB 20–29 SITE! 5–9 $50,000–$60,000 — — — 0.2 0.5 0.7 1.0 1.4 2.0 Source: Employee Benenfit Research Institute. 5–9 $30,000–$40,000 — — — 0.0 0.3 0.7 1.3 2.0 3.6 be a Lehman Aggre ppropriate at that gate Index (and later age. Barclays Capital U.S. Aggregate Bond Index), or three-month T-bills. These asset Percentile of 401(k) Participants 5–9 balance ratios. $50,000–$60,000 In 10 both cases, under t — hese assump — tions, the recovery times are so — 0.2 0.5 lar 0.8 ge as to e 1.1 ffectively el 1.5iminate the 2.0 Source: Employee Benenfit Research Institute. 5–9 3.15 Percen $40,000–$50,000 t Non-equity — Return As —sumption Percentile of 401(k) Participants —...................................................................................... 0.2 0.5 0.9 1.5 2.2 3.6 9 10% of the 300 % consistent sample participants in the age 56–65 age category would have had at least a 20 percent reduction in funds specifical example, exam ly enumerated ination of the age com for safe harbor position of treatment in the account bala regulations nces in thare: lifecycle (t e 2007 EBRI/ICI data arget-date) funds, balanced funds, base finds that 52 percent 5–9 $60,000–$90,000 — — 0.2 0.4 0.7 0.9 1.2 1.5 2.1 * 5–9 ________. Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. Fidelity Reports on $40,000–$50,000 2008 Trend — s In— 401(K) Plans. — January 28, 20 0.2 09. 0.6 1.0 1.6 2.3 3.7 EBRI makes information freely available to all classes were assumed to hav Recovery time and future s e fees of 75, tock mar 4k 5et p , and 45 basis erformanc points, respectively. e: This an 17 alysis also calculates how long it might take for 5–9 $60,000–$90,000 — — 0.2 0.4 0.7 0.9 1.2 1.6 2.2 Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. 5–9 Job Tenure $50,000–$60,000 10th 20th — 30th — — 40th 0.3 Median 0.6 60th 1.1 70th 1.6 80th2.4 90th 3.9 Job Tenure 10th 20th 30th 40th Median 60th 25 70th 80th 90th Contact EBRI Publications, (202) 659-0670; fax publication orders to (202) 775-6312. and ma possibility t naged hat accounts. the participant will ever recover their 2008 losses. In fact, using the lower rate of return in Figure 5 5–9 >$90,000 8 — 0.1 0.4 0.6 0.9 1.2 1.5 1.9 3.0 5–9 $50,000–$60,000 — — — 0.3 0.7 1.1 1.7 2.5 4.1 equities at y http://personal.fidelity.com/m ear-end 2007 if they were alloc yfidelity/Insi ated 100 deFidelity/index_ percent to target NewsCenter.shtml?refhp=cp -date funds. It woul d appear that this situation of participants with account balances of less than $10,000 were in their 20s or 30s. Similarly, 53 percent of participants 6 EBRI assumes a public service responsibility to make its findings completely accessible at www.ebri.org 5–9 EBRI’s We >$90,000 b site is easy to use and pac — 0.1 0.4 0.7 ked with useful inf 1.0 1.2 1.5ormation! 2.0 3.1 5–9 end-of (years) -year 2 $60,000–$90,000 008 401(k) balances to — recover to th — eir 0.2 beginni (years needed to recover) ng-of 0.5-year 20 0.9 08 levels, 1.3 before the sha 1.9 rp stock mark 2.6 et 4.3 (years) (years needed to recover) Periodic updates of these numbers are available at: http://ebri.org/index.cfm?fa=401kbalances Subscriptions to EBRI Issue Briefs are included as part of EBRI membership, or as part of a 10–19 Figure 6, Tim 24 $20,000–$30,000 e Needed to Recov — er From 2008 401(k) Loss — 0.1 es, 0.5 Using Variou 0.9 s Equi 1.3 ty Return A 1.7ssumptions, and 2.3 3.2 a 5–9 $60,000–$90,000 — — 0.2 0.6 1.0 1.4 2.0 2.7 4.5 results in a situation in which, mathematically, the participant would ne 2ver recover (infinite recovery time). This is explain Orders/ ed in more detail in Craig Copeland, "Use of Target Date Funds in 401(k) Plans, 2007," forthcoming. 10–19 changed mark 1–4 $20,000–$30,000 edly by year-end ——— 2008; — however, it — is likel 0.1— y that most o 0.6 — f the1.0 chan — ge is du 1.4 e to m — 1.8 arket fluct 0.1 u 2.4 ations, 0.5 as 3.3 5–9 with account — so that all deci balanc >$90,000 6 es greater tha sio — n ns that $100, relate to emp 000 0.1 were in t 0.5 hleir 5 oyee ben 0s or 0.9 60s. efits, wheth 1.4 er made in Cong 1.9 2.6ress or bo 3.7ard room 8.1 s or Holden, Sarah, and Jack VanDerhei. “C 1–4 — — an 401(k) Accumulations Generate Sign — — — ificant Income for Future Retirees?” — — 0.1 EBRI Issue 0.5 0% Average Account Balances 7 declines. Because future performance $199 annual sub is unknown, scription this anal to EBR ysis provi I Notes d and es a EBR ran I Issue Brie ge of equity ret fs. Individual urns: At a 5 perc copies are avail ent able 10–19 5–9 $30,000–$40,000 >$90,000 — — 0.1 — 0.2 0.5 0.7 1.0 1.0 1.4 1.4 2.0 1.9 2.7 2.4 3.9 3.3 9.5 Look for these special features: For example, a 200% Non-Equity R mong year-end eturn of 6.3 2007 EBRI/ICI database p Percent ............................................................................................... articipants in their 20s, the average allocation to equity funds w ....a10 s 255–9 ——— 0.2 0.4 0.7 1.0 1.3 1.8 10–19 10–19 $20,000–$30,000 $30,000–$40,000 — — — — 0.2 0.1 0.7 0.7 1.4 1.1 1.5 2.1 2.0 3.2 2.5 5.1 9.7 3.4 5–9 Brief, families’ ho no. 251; — and me ICI Perspe s, are — based ctive, on the highe —Vol. 8, no. 3 (Employee Benefit Resear 0.2st quality, most depe 0.4 0.7 nda ch Institute and Investment C ble informatio 0.9 n. EBRI’s Web 1.3 ompany site 1.7 posts opposed to It is possible t participant hat some of these participants were invested transfer activity. with prepa The 2008 asset a yment for $25 each llo in company s cation estimates (for printed tock via employer ma copiein Figure 10 s). Change of Address: suggest that only tching c EBRI, 1100 13th St. ontributio 15 ns that were percent 10–19 10–19 equity rate-of-return $40,000–$50,000 $20,000–$30,000 assumption, those — — with — — longest te 0.1 0.4 nure with t 0.8 0.8heir current 1.2 1.5 employ 2.3 1.6 er would need nearly 3.5 2.1 2.7 5.6 two years at 11.4 3.5 According to Fidelity 4 Investments (2009), their average work-place savings account balance declined 27 percent in 48 percent of a 10–19 ssets, compared with nearly 3 —— 90.4 percent of as 0.8sets among participants in their 60s. Younger participants also 1.1 1.4 1.7 2.1 2.7 Figures Subscriptions 6 and 7 summarize the information in Figures 4 and 5 to illustrate how important the equity return assumption 10–19 10–19 $40,000–$50,000 $30,000–$40,000 — — — — 0.4 0.3 0.9 0.9 1.3 1.6 1.7 2.4 3.6 2.2 2.8 5.4 10.5 3.7 10–19 — — 0.4 0.7 1.1 1.4 1.7 2.1 2.6 Institute, November 2002). all research findings, publications, and news alert th s. EBRI also extends its education and public service Research not able to be diversified. has shown that a worker’s a NW, Suite 878 ge is a major fact , Washington, DC or in his or , 20005-4051 her ability to r , (202) 659-0670; f ecover from ax number, (202 an economic ) 775-6312; downturn. 10–19 • EBRI’s entire library of researc $50,000–$60,000 — 8 — h publications starts at the main 0.5 0.9 1.2 1.6 Web page 2.0 . Clic 2.5 k on 3.4 10–19 of the oldest 4 $30,000–$40,000 01(k) participants (a —ges 56–65 — in 20070.3 ) had 90 perc 1.0 ent or more o 1.7 f th2.7 eir 401(k) assets 3.9 in eq 6.0uities. 12.0 the median 20–29 to recover, —but approximately 0.1 five years at 0.7 th 1.1e 90 perc 1.5 entile. If the equit 1.9 y rate o 2.3 f return2.8 is assumed t 3.4o had higher allocations to balanced funds, particularly to lifecycle funds. Among participants in their 20s, 14 percent of their 10–19 2008 (to $50,200 $50,000–$60,000 ) from $69,200 in — 2007. 0.0 For reasons e 0.5 xplaine 0.9 d below, this 1.3 loss may be 1.7 slightly l 2.1 arger2.7 than a similar 3.5 10–19 Figure 7, Tim 20–29 $40,000–$50,000 e Needed to 2 — Recov 0.0 — er From 0.6 2008 401(k) Lo — 1.1 0.5 sses, 1.2 1.4 Using Variou 2.01.8s Equi 3.0 ty Return A 2.2 4.3ssu2.7 mptions 6.5 and 3.312.7 a is on the reco -10% very time calculation, as well as the diversity in recovery times for each tenure grouping (by showing both role to improving Ameri e-mc aan il: s’ finan subscriptions@ebri.o cial knowlerg dge thro Membe ugh its a rship Information: ward-winning p Inquiries reg ublic service arding EBRI campaign 10–19 26 $60,000–$90,000 — 0.2 0.7 1.0 1.4 1.8 2.2 2.7 3.6 10–19 $40,000–$50,000 — — 0.6 1.3 2.2 3.2 4.6 7.1 14.6 Ibbotson Associates. Holden and VanDerhSBBI (Stocks, Bonds, ei (2002) simulated t Bills he lik , and Inflation) 2002 Yearb ely impact of a major bear m ook: Market Results for 1926– arket—defined as three consecutiv 2001. Chicago: e years Source: Employee Benefit Research Institute. For example, EBRI Issue Briefs hardship withd and rawals at Fide EBRI Notes lity increased slightly in the last year for our in-depth and nonpartisan periodicals 9 from 1.6 to 1.8 percent; however, loa . ns 10–19 401(k) assets were invested in lifecycle fund drop to zero Another 5 per $60,000–$90,000 for the next few years, t cent had 80–90 percent — his in r eeq s, while among pa covery time i 0.2 uities, and 9 0.7n perc creases to a rticipants in their 60s, almost 7 percent were invested in ent h 1.1ad p 70 proximately 2. –81.5 0 percent in 1.9 5 years equitie at th s. Ag 2.3e greg median ating 2.8 an th d ese thre nine to 3.7 e 10–19 $50,000–$60,000 ® — — 0.6 1.3 2.0 2.9 4.1 6.1 11.6 Source: Employee Benefit Research Institute. 100% th 18 number computed for t Non-Equity Reh turn e enof 3.1 tire universe 5 Percent of 4.............................................................................................. 01(k) participants in 2008. ... 10 a 10–19 >$90,000 — membership and/or contributions to EBRI-ERF 0.5 0.9 1.3 1.7 should be directed to EBRI President/ASEC 2.1 2.5 3.1 4.1 10–19 the median as $50,000–$60,000 C well as t hoosetoSave he 70 pe and the rce — ntile) companio . 0.0 In Fin site gure 6 (6.3 percent 0.7www.choo 1.4set non osav - 2.2 equity r e.org eturn 3.2 assumption), 4.4 even t 6.6 hose wit 13.1 h Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. 0 a Ibbotson Associates, 2002. th 10–19 initiated during this time actually decreased >$90,000 — form 9.7 to 9.0 0.5 1.0 percent. Moreover, the portion of 1.4 1.8 2.1 plan sponsors in their database 2.6 3.2 4.3 10–19 lifecycle funds. of a Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. –9.3 perc $60,000–$90,000 ent annual return—on t — he overall 0.3 (nomin 0.9 al) replac 1.6 ement rates 2.4 that cou 3.3 ld be provi 4.6 ded by “4 6.7 01(k) 12.9 10 y categori ears at t es tog he 90 ether, t perc he enti percle. entag e of 401(k) participants ages 56–65 in 2007 with more than 70 percent of their b 20 or more $20,000–$30,000 — Chairman Dallas — Salisbur 0.3 y at the above 0.9 address, ( 1.4 202) 659-0670; 1.9 e-mail: salisbur 2.6 3.4 y@ebri.org 4.7 10–19 $60,000–$90,000 -10% -10%— -5% 0.3 -5% 1.0 0% 1.80% 2.6 5% 5% 3.6 10% 5.0 10%7.3 14.6 • "Non-equity" meaning a bond or other stable-value investment. To get answers to many frequently asked questions about employee bene? ts, click on b 20 or more the highest job tenure categori $20,000–$30,000 es have median — — recovery 0.4 time of less th 1.0 an two 1.6 years 2.1 for a +5 a 2.8 nd +10 perc 3.7ent equity 5.1 10–19 that temporarily suspend >$90,000ed or reduced the c — o0.6 mpany 401(k) 1.4 match was less than 1 p 2.2 3.1 ercent of the spons 4.1 5.7 ors that had m 8.8 a21.9 tched 8 "Non-equity" meaning a bond or other stable-value investment. ________. Ibbotson Target Maturity Report (Fourth Quarter 2008). accumulations c -20% ” as a function Median of 70th when th Median e downt 70th urn occu Median rred durin 70th g the em Median ployee’s 70th tenure Median with the ret 70th irement plan 20 or more $30,000–$40,000 — — 0.5 1.0 1.6 2.1 2.7 3.5 4.6 10–19 This is based on analysis of >$90,000 Fidelity's 17,095 corporate 401( — 0.7 1.5 k) plans, representing more 2.4 3.3 4.6 than 11 million participants. 6.4 10.0 30.3 Figure 8, 401 Given 401(k) that port the foli(k) Rec account o in equities h o bal very anTime, by ad decre ce growth ased from Job or decli Tenure n4 e 3de perc and S pen ed a ns to a t at ye lary: Equi large ar-ety Return Opti nd ex 20 tent o 07 to n th 29 e r ons Assuming pe atio of rcent at year accouna Non-equity -en t bala d 200 nces to 8. annual The historic equity rate of return on equities is about 10 percent per year. c 20 or more $30,000–$40,000 — — 0.5 1.1 1.7 2.2 2.9 3.7 4.9 20 or More EBRI is sup $20,000–$30,000 ported by or — ganizations from all industries and sectors that appreciate the value of — 0.4 1.3 2.5 3.9 6.6 12.3 57.6 in 2007. Bene? t FAQs. Percentile Percentile Percentile Percentile Percentile Near-elderly with very return, a The historic equity rate of return on equities is about 10 percent per year. nd 2.3 years if the high e equityq retu uity ex rn assumption is posure: Estimates from t zero. However he EBRI , the m /ICI edi 401(k an recovery times ) database show that for this grou map ny http://corporate.morningstar.com/us/documents/q4ibbotsontargetreport/maturityreportq42008.pdf 20 or more $40,000–$50,000 — 0.2 0.8 1.3 1.9 2.4 3.0 3.8 4.9 20 or More 9 Editorial Bo $20,000–$30,000 ard: Dallas L. Salisbury, publisher — ; Stephen Blakely — 0.5 , editor. Any 1.5 views expres 2.8 sed in this p4.6 ublication and th 8.1ose of the author 17.1 s sho248.7 uld 0% sponsor. Return of 6.3 Percent .................................................................................................................... 13 20 or more contributio The Fidelity av ns, $40,000–$50,000 the ch erage account ange in average accou balance for yea — n 0.2 rt ba -end 2007 is s lances 0.9 during t lightly larger than a similar av his 1.5 period is a 2.0 function 2.6 of si erage computed for all 22 million ze o 3.2 f the account 4.0 balanc 5.1 e. 20 or More $30,000–$40,000 — — 0.7 1.6 2.8 4.3 7.0 12.5 41.5 27 unbiased, reliable information on employee benefits. Visit www.ebri.org/about/join/ for more. 20 or more not be ascribed to the officers, $50,000–$60,000 trust— ees, members, or 0.1 other sponsors of the E 0.7 1.3 mployee Benefit Research 1.8 2.3 Institute, the EBRI Educ 2.9 3.6 ation and 4.7 20 or More partici For example, pants n $30,000–$40,000 ear ret Fidelity (2009) irement had e reports — xcept that au ionally h — to-enrollment increased to 16 pe igh ex 0.8 posure to 1.8 equities: Ne 3.2 rcent from 11 percent am arly 1 in5.0 4 betwee8.3 n ages 56 ong their plan 16.7 –65 had more 98.1 increase to 3.3 years with a –5 percent equity return and 6.0 years for a –10 percent equity return. In each job Up to 35 36–45 46–55 56–65 Investment Co mpany Institute. “The Impact of The Financi Equity Return and Percentile Distribution al Crisis on Workers' Retirement Security.” Hearing before the 20 or more $50,000–$60,000 — 0.1 0.8 1.4 1.9 2.5 3.1 3.8 4.9 20 or More participants in the EBRI/ICI 401(k) database • EBRI’s reliable health and retirement surveys are just a c $40,000–$50,000 — ($65,454). 0.2 1.1 2.2 3.6 lick a 5.5way through the topic 8.9 15.9 63.3 Figure Resear 1 sho ch Fund, ws these c or their staffs. hang Nothin es from Ja g herein is to be co nuary 1, 20 nstr 08, to ued as an attem January pt to aid or 20, 2009, hinder base the adoption d on the of a year- ny pending le end 200 gislat 7 EB ion,RI/ICI regulation, 40 1(k) 20 or more $60,000–$90,000 — 0.3 0.9 1.4 1.9 2.4 3.0 3.7 4.7 20 or More -3 $40,000–$50,000 0% — th 0.2 1.3 Ag 2.6 e 4.1 6.4 10.7 20.9 194.7 sponsors in the last year. than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 per- Education and Labor Committee, U.S. House of Representatives, October 21, 2008. 20 or more tenure/equity return combin $60,000–$90,000 ation, — the 70 perc 0.3 entile is 1.0 (by definition 1.5 ) larger 2.0 than the medi 2.6 an, 3.2 but a lower equity 3.9 r4.9 eturn 20 or More That analysis found that a $50,000–$60,000 ge and ten — ure ha0.1 d a big effect 1.0 on how 2.1 badly an 3.4 economic5.1 downturn a 7.9ffected a 14.4 401(k) 43.1 10 Figure 9, 401 Conc or interpretative lusion (k) Rec rule, or as overy legal, Time, by accounting, Job actuarial, o Tenure r other such prof and Salary: Equi essional advice. ty Return Options Assuming a Non-equity Source: Author's calculations based on year-end 2007 data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 20 or more boxes at the top of the page >$90,000 — . 0.7 1.2 1.8 2.3 2.8 3.5 4.4 6.0 20 or More It is important to note that the analysis in this $50,000–$60,000 25–34 — 0.2 Issue Brief 35–44 1.2 is confined to the participants 2.4 45–53.9 4 6.1 ’ 401(k) plan with their current 55– 9.6 64 18.0 97.7 database of more than 21 million participants. Those with low account balances relative to contributions experienced 28 a 20 or morewww.ici. >$90,000 org/home/08_house_ — ret_security_stmt.html 0.7 1.4 2.0 2.5 3.1 3.7 4.6 6.4 20 or More cent. As a res $60,000–$90,000 ult of the Pension Prot — ection Act of 0.3 2006, 1.3many 401(k) 2.4 plan sponsors 3.7 appe 5.5 ar to be 8.4 offering lif 14.6ecycle/ 47.5 Fidelity (2009) reported that lifecycle funds Losses are defined as the difference between year-end 2007 and 2008 account balances. This is NOT limited to investment loss. were used as the default in 60 percent of their plans in 2008, up from 38 per- assumption accentuates the difference. With a +10 percent equity return assumption, the largest tenure category's participant’s Return of assets. Based o 3.15 Perc nent a m ......................................................................................................... edian (or mid-poi (Figure 8 cont'd. next page) nt) income replacement rate of a Age bout 51 percent of an indivi ......... dual’s 16 20 or More 401(k) plans h $60,000–$90,000 ave come under incr —easing sc 0.4 rutiny durin 1.5g the re2.7 cent financial cr 4.2 isis (P 6.5 uzzanghera, 10.2 2008). 18.5 Although this 96.9 employer and does not include information on either 401(k) plans with former employers or (most importantly) 401(k) b "Non-equity" means bonds and other stable-value investments. (Figure 9 cont'd. next page) 20 or More relatively Sources: mini 1999 and mal investme >$90,000 2006 Account n Balan t losses that ces: T — abulationw s from e 0.9 re ty EBRI/ICI pically Partici 2.0 mpant- ore than Directed 3.4 ma Retire de u ment 5.1 pPlan Dat by ne a Coll w c 7.8 ectio ontributio n Project 12.9 ; 2007 and 20 ns. For exam 30.3 08 Acco ple, unt infinity cent in 2007. target-date funds, which automatically rebalance asset investments into more "age appropriate" allocations. Had all • Instantly get e-mail noti? cations of the latest EBRI data, surveys, publications, and meet- Laise, Eleanor. “Investing in Funds: A Monthly Analysis—Financial Crisis Highlights Shortcomings of 401(k) Plans.” Wall Street 20 or More >$90,000 — 1.1 2.4 4.0 6.1 9.5 16.9 48.9 infinity estimated EBRI Issu rec e Brief overy time is registerinc ed in the U. reases from S. Patent and T 1.4 to radem 2.2 years. ark Office. Wit ISh SN: 0887 a zero - e 13q 7X/90 uity r 0887 eturn -13 assumption, it 7X/90 $ .50+.50 increases from 2.3 to final balances that Balance income, s: EB Sources: 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2008 an t have been rolled RI esti he mo mates. T dele he an d th alree-ye y over to IRAs. sis is based ar down on a consi EBRI is currentl turn stent sam woul ple of d res 2.2 mi y in the process of enha ult in llion parti a lower cipants rw eith plac account ement ncing bala ra nces a its research capabilities to allow t te for t the d 2009 account end 401(k) of each partici year from 199 pants i 9 n the his is largely due to the financial market impact on existing account balances, there have been several reports of employers (Figure 8 cont'd. next page) participants with less than $10,000 in account balances at year-end 2007 had an estimated average growth of more through 2006 balances: EBRI estimates. The analysis is based on all participants with account balances at the end of 2007 and contribution . information for that year. 401(k) pa Jo rticipants been urnal (11/3/08). in the average target date (Figure 9 cont'd. next page) fund at the end of 2007, 40 percent of the participants would have ings and seminars by c licking on the Sign Up for Updates box at the top of our home page. Figure 10, Asset Allocati kind of data to be captured. This will on Distribution allow liof 401(k) Par nking of accounts across data prov ticipant Account Balances iders withi to “Equity n the database’s universe of ,” by Age: Year-end th 4.3 years, and at a –10 percent equity return assumption, it increases from 6.0 years to a situation where the lowest-income quartile of only –3.2 percentage points at the beginning of their career, or –7.5 percentage points for cutting back on matching contributions during 2008 (Laise, January 8, 2009). Moreover, there have been reports that 1100 13 Street NW · Suite 878 had at than 40 leperc ast a ent durin 20 percg ent 20de 08crease in , while those their in t equity conc he $10,00 en 0–$ trations, and c 50,000 range ro onseque ughly broke even, ntly, may have m on a iti vgated the erage. Howe ir los ver, ses, individual account plans, resulting in a more complete and accurate retirement picture—such as measuring the effect of ________. “Big Slide in 401(k)s Spurs Calls fo 2007 and 2008 .................................................................................................................. r Change.” Wall Street Journal (1/8/09). 3 ........... 19 Washington, DC 20005 those in mid-career (ages 39–41), or –13.4 percent for those at the end of their career. many workers have been taking out 401(k) loans or hardship withdrawals in recent months because they can no longer © 2009, Employee Benefit Research Institute -Education and Research Fund. All rights reserved. rollovers, multiple accounts, job turnover, and account leakage. sometimes to an appreciable extent. (202) 659-0670 There’s lots more! www.ebri.org www.choosetosave.org ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 ebri.org Issue Brief • February 2009 • No. 326 15 17 18 13 16 10 14 8 9 ebri.org Issue Brief • February 2009 • No. 326 5 Visit EBRI on-line today: www.ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org A research rep Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri ort from the EBRI e e e e e e e e e effffffffff • Februa • Februa • Februa • Februa • Februa • Februa • Februa • Februa • Februa • Februar r r r r r r r r ry y y y y y y y y y 2 2 2 2 2 2 2 2 2 2Education and R 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 009 • No. 326 esearch Fund © 2009 Employee Benefit Research Institute 11 20 21 12 19 4 2 7 6 3 Years Years