Automatically enrolling new workers appears to be a significant factor in increasing account balances in 401(k) plans, with lower-income individuals benefiting the most, according to a new model developed by EBRI and the Investment Company Institute (ICI). The finding is important because employment-based 401(k) plans have become the dominant retirement savings option for millions of American workers, and the amount of retirement income many Americans will have when they reach 65 will depend to a large degree on how long they participate in a 401(k) plan, how much they contribute to the plan, and how they invest their 401(k) assets.

• Whether many individuals’ 401(k) plan accumulations will provide significant income in retirement has become a public policy concern in recent years. The validity of such a concern cannot be assessed by looking at the 401(k) accumulations of today’s retirees because these individuals have not participated in 401(k) plans throughout their working years.

• The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) have collaborated to develop the EBRI/ICI 401(k) Accumulation Projection Model. This model examines how 401(k) assets might contribute to retirement income for future retirees based on decisions workers make throughout their careers and finds that the median replacement rate from 401(k) accumulations depends primarily on whether current participants will continue to work for employers sponsoring 401(k) plans. For example, the lowest income quartile participants turning 65 between 2030 and 2039 are simulated to produce a median replacement rate of 25 percent if future coverage is only a random occurrence but 51 percent if each subsequent job is covered by a 401(k) plan. The highest income quartile for that generation has a similar disparity: a 30 percent replacement ratio in the non-continuous coverage situation and 67 percent if coverage is continuous.

• This report builds on the model scenarios presented in Holden and VanDerhei (November 2002). It presents new scenarios that examine the role that 401(k) accumulations might play in retirement by analyzing certain factors that influence outcomes for 401(k) participants, including: plan design, through automatic enrollment; tax policy, through catch-up contributions; and individuals themselves, through saving in IRAs when not offered 401(k) plans.

• A new EBRI/ICI model scenario demonstrates that the effects of automatic enrollment on replacement rates at retirement depend heavily on the default contribution rate and default investment option that the plan sponsor selects. For the lowest income quartile eligible workers turning 65 between 2030 and 2039, the median replacement rates from 401(k) accumulations increase from 23 percent without automatic enrollment to 37 percent for automatic enrollment with defaults of a 3 percent contribution rate and investments in a money market fund. The median replacement rate for this group increases up to 52 percent when the default contribution rate is 6 percent and life-cycle funds are used as the default asset allocation.

• A second new EBRI/ICI model scenario captures the impact of catch-up contributions by assuming that all 401(k) participants age 50 or older who are projected to contribute at the limit in a given year also make the additional catch-up contribution. The model forecasts that individuals in the highest income quartile when they reach age 65 generally would have higher projected replacement rates as a result of taking advantage of catch-up contributions.

• A third new scenario shows the effects of individuals’ taking advantage of IRAs when they are not offered 401(k) plans. This scenario assumes participants contribute to IRAs in an effort to replicate their 401(k) contribution experience, while considering IRA contribution limits. Although projected replacement rates at age 65 increase across all income groups when individuals not offered 401(k) plans contribute to IRAs, the results are most promising for lower income quartiles at retirement. Contribution limits for IRAs generally allow sufficient saving for lower income individuals to replicate their 401(k) experience. Higher income participants find themselves restricted by the lower IRA contribution limits, and thus do not do as well as they would if they always work for employers offering 401(k) plans.

Welcome to the Employee Benefit Research Institute On-Line Figure 3 Figure 13 Figure 11 EBRI 1 Median Replacement Rates for Participants Turning 65 Figure 15 Figure 5 Distribution of Number of Years Out of a 401(k) Plan Over Projected Career Internal Revenue Code Deferred Contribution Figure 8 Figure 9 36 Figure 2 Between 2030 and 2039, by Income Quartile at Age 65 certain factors that influen contributi For eligible non-participating workers, the projecti In the baseline Figure 7, Part ____ The effects of ___ ng a _. “4 t the 402( 01(k) Plan Pa icipation Rates Before and After Au m In odel, the median indivi autom tern g) li al Reven ce outcomes for 401( amit reduces t ti c en Default Contribution Rate in Plans With Automatic Enrollment rticipants: Character rollment on replace ue Coh de m e dual am Todeled i rad k) part it io istics, ong par n ment to m on a icipants, including: m l IRA Co pm act. This is because a Contributi tic Enrollm rates at retirement depend he odel use ticipants in the lowest income quartile at age 65 is ntrib s ------------ ons a u en three-step process that take t, and Account io t at the Beginning and End n pla L imit many n d esign s, 2001–2008* 401(k) Activity.” , through autom 2 avily on plan participants the default ICI Research s place at of the atic Limits in 401(k) Plans, 2001–2006* 1 ------------ 2 E B R I (percentage of participants at age 65 between 2030 and 2039) Re Endnotes Automatic Enrollment ference s Percentage of Participants Choosing Automatic ------------ Employee Benefit Research Institute 31 32 Distribution of Replacement Rates From 401(k) Accumulations $15,000 to anchor their contribution rates and/or(percentage of f asset allocation at th inal five-year average salary) e defaults. In addition, one would expect that the portion of projected to see his or her 401(k) accumulations replace a cannot contri job change af Outline enrollment; contributi 14 Series (Spring 20 Projection, by Incom tax policy on r bute to t ter y aear-end 2 te and default investment option 00). h, thr e 40 Diagram of Annual Growth Cycle of 401(k) Accumulations* ough 2(g) lim 000 t catch-up contrib o e Qu determine enrollm it because of lower plan-im artile ................................................................................................. utio (percentage of plans) that th ns; and ent. First, the model determ e plan sponso bout 51 percent of pre-retirement income (Figure 8, indposed lim ividuals themselves r selects. All else equal, the higher the its or no inndiscrim , through s es whether the worker ination testing. aving in IRA ......... s 11 Sarah Holden is senior econom EMPLOYEE ist with the Research Department at the Investment Company Institute. Jack Back Forward Home Reload Images Open Print Find Stop For example, Investment Company Institute (Spring 2000) surveyed households with 401(k) plans and households 31% Enrollment Defaults, by Salary Group Browning, M The EBRI/ICI 401(k) EBRI Issue Brief a 402(g) Limit rtin, and Th Accum omas F. Crossly u lation Projection Mod . “The Life-Cy el is cle Model an extension of the E of Consumption and Savi BRI/ICI project’s extensive ng.” Journal of 25 for Participants Turning 65 Between 2030 and 2039, by Income Quartile empl oyees who have already switched out of the defaults would continue this behavi $14,000 or upon job change. However, the Figure 7 Any VanDerhei, T beco top panel). When all eligible e when not offe The next section briefl default contri m participants who are prevented from es a 401(k) participant based on t e red 401(k) mbution ple Univer rate, th pl y ans. describes the E sity m e higher the r , ploy is resear ees are included in hch director e em reachi BRI/ICI 401(k) Accu eplacement ra ploy ng th ee’ of the Em e 402(g) lim s age and salar the m tes at retirement. Given th odel, the median re ploy mit b u ee Benefit Research Institute Fellows lat y (Figure 4). yion Projection Model and either planplace design or Second, e historical tendenc ment rate for the the m presents the odel y of 1 in the EBRI/ICI 401(k) Accumulation Projection Model 58.2% offered 401(k) plans but not participating. Non-participants were asked their reasons for not participating in 401(k) E (in real 2000 dollars) MP LO YE E Issue Brief See Ceru Figure 8, Dist lli Associates (20 ribution of R 04). eplacement Rates From 401(k) Accumulations for Participants Turning 65 Economic Perspectives analysis of millions of 401(k) plan . Vol. 15, nop . 3 ( articipants Summer 2003): 3– . A significant polic 22. y concern is that many employees do not BENEFIT (percentage of final five-year average salary) $5,000 decision The miss to remainion of the Employee B with automatic enrollment dee fau nefit Research I lts is made at job chan nge a stitute (EBRI nd depends on sal ) ary, without any 401(k) Catch-Up Participation Rates Before and After Automatic Enrollment at $13,000 deter nondiscrim original baseline results. For com Program lowest inco equit Ippolito, Richard A. mines y . Spe securities to generate higher retur ination testing me quartile is onl whether the participant contri cial thanks to Pension Plans and are not recognized as eligible Luis Alonso, y about 23 parison, projected Social Security replace percent of resea butes the automa Employee Performance: E ns than fixed- rch anal pre-retirement inco ysto m t at EBRI, income securities, 401(k) tic enroll ake catch-up contri ment default rate or an am who maintains the EBRI/I v m idence, Analysis, and Poli e (Figure 8, bottom ment rates in the first y butions plans that set a by t panel). The he CI database, ount based on model. cy ear of life-cy . Chicago, cle plans. Respondents were allowed to give multiple reasons; about a third of non-participants indicated that they were not 38.4% 2 participate in the 401( Between 2030 and 2039, k) plans sponsored by by Incom their em e Quartile ploy.................................................................................... ers (in some cases because the employees are not 13 7 Traditional IRA Contribution reflection on priohttp://www r experience .ebri.org in 401(k) plans. See Inv is to contribute to, to B estm E N en E t Co F Im T p any Institute (20 encourage, 05). and to enhance the development of Quartile 1 contributi retire reduction in r Automatic E The availability of catch-up contributions fund IL: The University ment are as the default investment option tend to have on behavior e n also presente placement rates is le rollment of Chic obse the Beginning and End of the Projection, by Income Quartile rd. The third section adds n ved am ago Press, 1997. ong ss dramatic among the higher inc EBRI/ICI 401(k) plan increases on-participants to the m high the projected replacement rate of the m er forecaste participants. Third, the m ome d replace quartiles because these workers ten 106% odel and exa ment rates co odel determ mim nees the effect dian pared with plans ines d and to Craig participating because Copeland, senior research the 401(k) plan’s features were associat $12,000 e at E confusing. BRI, who tabulated Current Population 25% Survey (CPS) RESEARCH Baseline Model eligible). Participation rates are the lowest am Cerulli Associates. “Retirement Markets 2004.” ong Cerulli Quantitative Update lower income workers (Figure 4). Som . Boston, MA: Cerulli e of these non- 26 No. 283 3 IRA Catch-Up At Year-End: sound emplQuartile 2 oyee benefit programs and sound public policy through The Figure 9, Per 3 percent defa centage of Participants Choosing Au ult contribution rate and m(percentage of eligible workers) oney market to fu matic Enrollment Defaults, by nd analysis is based on the resul Salary ts from Choi Group et ................ al. (2001 15 whether the participant accepts the de that autom and Surve to have hig indivi Many that have a mone 15 dual in wor y ah tic enrollment has on replace of Consum er participation rates in the absence of k the fourth i ers do not y m er Finances (SCF a parti nrket fund as the def come quartile at age 65 by cipate in the 401(k) fault autom ) data for some ment rates am ault investment opti a plans ti au c enrollm 3 percentage points com tomatic enrollment. For exam ong all eligible workers. The fourth se offered b modules of the m ent asset allocation or selects asset allocation in on. y their em odel. ploy pared with the ers. Replacemen ple, among the highest m ction m odel baseline, t rates fall odels the The EBRI/ICI 40 R 1(k) Accumulation Projection Model is p32.7% art of an ongoing collaborative research effort between the E S E AR C ® H $4,000 14 $4,000 $4,000 $11,000 Another element of plan design that may be coupled with automatic enrollment is to automatically increase the (401(k) participants only) participants may Associat What’ es, Is New? What’ nc., 2004. not join the plan s Cool? Destinations Net Search People Software because of inertia or confusion. Automatic enrollment uses employees’ EBRI Employee Benefit Research Institute Issue Brief $ 401(k) Account Balance (ISSN 0887 -137X) is published monthly by the Employee Benefit Quartile 3 I NSTITUTE $10,500 and 20 objective r 04). The 6 percent esearch and educatio default contribution rate an n.d l ife-cycle fund analyses assume that workers respond to these Employee Benefit Research Institute and the Investment Company Institute. In this ongoing research effort, known as line with his effects that catch-up contri income quartile, the projected replacement rate at ag to 70 significantl Madrian, Brigitte C., and percent of pre-retirement incom Figure 1 hi y,or her age as observed am especially ghlights the repl among l butions Dennis F. Shea. “The Power oacement rates for all e wer income workers, have on incom e. B ong EBRI/ICI 401( ecause individua e replacement rates at retirement am e 65 is 67 percent of pre-retir when the m ligibl of Suggesti ls in the lower inco k) e plan p workers wh o articipants. The m del considers all eligible workers on: Inertia in o would me quartiles generally em have had a full career’s 401(k) Partici ent inco odel assumes that the ong 401 me in the (k) plan pation and are less contribution rate over time. For example, T Beginning of Projection (Year-End 2000) haler and Benartzi (2004) developed Save More Tomorrow or SMarT™. Research Institute, 2121 K Street, NW, Suite 600, Washington, DC 20037-1896, at $300 per year or is included as part of a Figure 10, Median Replacement Rates From 401(k) Accumulations for All Eli87% gible Workers Turning 65 inactivity I to their advantage by making them automatic savers. July 2005 N S TI TU TE Asset Allocation of Account Balance Quartile 4 ® defaults as they did to the 3 percent contribution rate and money market fund defaults. In addition, the model assumes a 84% 84% the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, EBRI and ICI gather data from some of percentage of participants choosing t participants. The fifth section analy baseline likel because current non-participants will tend to have m exposure to t Savings Behavior.” y to m be contribut odel and 56 wo of the four different automatic enrollmen ing at percent when all eligible workers are included. NBER Working the limit, the i zes how IRA contribu he automatic en Paper mpact of . No. 7682. cat u ro ch-up on the ch llm lower 401( Cam tions can benefit workers when their e ent defau t scen bridge, MA: National Bureau of Econom median repla arios analy lts (the second and thir k) accumuzed in lati ceons when the ment rates i this report. T d stn eps) depends y the other turn mh ploy e first, m 65 t ers do ic han ore This report is membership s being p ubscription. Periodic ublished sim als po ultaneously as an stage rate paid in Was ICI Perspecti hington, DC, and ve, additional mailing offi and is available on bot ces. POh or STMASTER: Send ganizations’ Utkus (November 2002) reports on the successful implementation of voluntary adoption of SMarT contribution rules at Before Automatic Enrollment After Automatic Enrollment Between 2030 and 2039, by Income Quartile at Age 65 ................................................................... 15 Choi, Jam With autom es J., David Laibson, Brigitte atic enrollment, the employ C. Madrian, er notifies th $ Contributions and Andrew Metrick. "Saving For Retir e employee that a certain percentage of his or her ement on the 25th Percentile 33 Median 75th Percentile th 50 percent of salary em $3,000 ployer match $3,000 for participan $3,000 ts automatically enrolled in the in the plan with the default options. their m embers that serve as plan recordkeepers. The data include demographic information, annual contributions, address changes to: EBRI Issue Brief, 2121 K Street, NW, Suite 600, Washington, DC 20037-1896. Copyright 2005 by Employee on the em Web sites at not offer 401(k) plans. Following the income quartiles was indistinguishable fr workers who are currently As Figure 8 also shows, there is a ra conservative, automatic enr Rese arch, Ma ploy www.ebri.org ee’s incom y 2000. e and (Figure 9). F participating owww.ici llment s conclusion, references ar nge o cena .(Figure 1). The org r exam om of results for participants. The 25 . The authors wrote this zero. rio features ple, a worker in his difference a 3 percent default contribut e pre in replacement rates at reti or her 20s wi sented. Issue Brief percentile is the replacement with assistanc th a salary ion rate with of rem e$32, fro ea nt between m 000 wo m the oneyul d two divisions of one of The Vanguard Group’s corporate recordkeeping clients. $ Loan Outstanding Path of Least Resist salary Benefit Resea will be contributed i rch Institute. All right ance.” n Originally prepared for to the 401(k) plan unless t s reserved, No. 283. Tax Policy and t he employee h responds and e Economy 2001 cancels the enrollm , updated draft: Jul ent y 19, 27 participant account balances, asset allocations, and loan balances. The year-end 2003 EBRI/ICI database contains Figure 11, WHAT I Int S EBRI ernal Revenue Code Deferred C ? ontribution Limits in 401(k) Plans, 2001–2006 ..................... 17 have a 52 percent chance of beco rate that three-quarters of the individuals in a given all eligible workers and the baseline (401(k) par In market fund as the default invest the projection model, the future eq ming a participant (Fi u m ity ret ent option; the urns are sim ticipants onl income quartile are forecast m ila gure 4) and then a 38 perc or to h re aggressive second scenari y istorical retu ) diminishes as income rises because rns experienced by ed to m ent chance of stay o features a 6 percent eet or exceed. The the S&P 500 betwee ing with n Institute’ 16 s research and editorial staffs. Any views expressed in this report are those of the authors and should 67% 15 88% Vanguard (July 2001) also repofor emplo rts that most plan sy poee benefits r nsors chose a default co esear ntributioch n rate of 3 percent or less (while The Influence of Automatic Enrollment, Catch-Up, and 2004 within a certain tim . e period. The employer sets the initial contribution rate and allocates the contribut 18.9% ion to info thrmation on 15.0 million 401(k) plan participants, in 45,152 plans, holding $776.0 billio 94% n in assets (see Holden and 93% 1926 EBRI pro and 2001 (v sides credible, reliable, and objecti ee “large company stock 92% s total returns” in Ib ve research, data, and analysis. The botson (2002)). Between 1926 and 2001, abou belief: t two- 92% thirds the autom not be ascribed to the 75 participation default contri Mitchell, Olivia and Steph percentile is the projected replace atic enrollm rates tend to rise as inco bution ent d officers, trustees, or other spons rate with a life-cy efaults (Figure 9). en P. Utkus. me me increase nt rate that cle fund as the d “Lessons fro s. a quarter of the ors of EBRI, EBRI-ERF, or their staffs. Neither EBRI m e Behavioral fault investment option. individuals Finance for Retire would m m eet o ent Plan Design.” r exceed. 91% 21.5% 59% $2,000 about a quarter of Chec plan sponsors selected a k Out EBRI’ The Employd ee efau Benefi lt cot Research Institut ntribution rate s W ofe 4 p (EB ercen RI) was founded in 1978. Its eb Sit t or higher). Hewitt (200 e! 5) mrepo ission is to rts that Figure 12, Distribution of Number of Jobs Held Over Projected Career........................................................ 17 a default invest VanDerhei (August me 2 nt option. Most em 004)). ployers pick modest contribution rates as the default, likely to lessen the 10% 10% 54% of the time, equity returns in any given year have fluctuated between –7 percent an78% d 33 percent. The total return used 85% 9 nor EBRI-ERF lobbies or t Pension Research Council Neither public nor private policy The conservative autom 52% akes positions on specific polic a W tio c enrollmen rking Pap or initiatives, et scenario resul r. PRC WP 2003- whether institutional or individual, can be y pr ts in projected m opos 6. Phila als. EBRI invites co delphia, PA: edian repl Pension Research Council, ace mment on this ment rates that are IRA Contributions on 401(k) Accumulations at Retirement contribute to, to encourag 51% e, and to enhance the development of sound employee benefit about a third of plan sponsors with automatic enrollment select a default contribution rate of9% 2 percent or less; about half EBRI/ICI 401(k) Accu Saving in IRAs When Not in 401(k) Plans mulation Projection Model burden of the 4 ____ ____. "For Better or For Worse: Defau automatic enrollment on the reluctant e lt Effects m and 401( ployees. Profit Sharing/401(k) Council of America k) Savings Behavior." Pension Research for bonds, GICs, money market funds, and other investments in the projection is the “long-term government bonds total Figure 13, Distribution 72% of Number of Years Out of a 72% 401(k) Plan Over Projected Career ............................ 18 Retirees potentially have several sources of income in retirement, including Social Security benefits, income fro $5,000 m Automatic E The Wharton higher for lower inco nrollment Pr School, Univ meojection Res workers th ersity programs and so of Pen an when automatic enrollment is ults nsy und public policy lvania, 2003. through objective not available to them research and education. EBR . Autom I is the only atic resea successful unless they a rch. 7% 7% re founded on sound, Established in 1978, the E objective, relevant, verifiable inf mployee Benefit Resear ormation. ch choose 3 percent; and 17 percent select a default contFi rig bu ur tie o 1 n rate of 4 percent or more. 75% (PSCA; 2004 Council W Empiri Some research suggests that 401(k) The starting point for cal Research on A orking Pa ) reports that 58 percent of per. PRC WP 2002-2. Philadelphia, PA: Pe proje utomatic Enrollment cting 401(k) plan participants plans with au accumulation tomatic enrollment set the em are different from s and replace nsion Research ment rates other workers because they Council, The at retire ploym ee contribution ent is the EBRI/ICI Wharton are rate retuby Sarah Holden, ICI, and Jack VanDerhei, Temple University and EBRI Fellow rns” from the beginning of 1926 to the end of 2001 (see Ibbotson (2002)). Historically, about two-thirds of the time, $1,000 67% private, nonprofit, nonpartisan, Washington, DC-based organi $1,000 zation committed exclusivel $1,000 y to defined W benefi ho we are t and/or defined co ntribution retirement plans and IRAs, income from other individual savings, and Figure 10 com enrollment has the greatest pares the replace impact on thi ment rates of four s group 1 Rollover IRA because different automat those in the lowest income quartile ar ic enrollment scenarios wit 2 he the least the • 17 EBRI is funded by membership dues, grants, and contributions. EBRI’s financial base $4,000 www.ebri.or 34 g Figure 14, Median Replacement Rates From 401(k) Accumulations for Participants Turning 65 Between Holden and VaM nDe edi rhei an R (Oct epl obe acr em 20e 0nt 1) R fin ad te m so Fr re tom han 4 ha 01 lf o (k) f A part ccium cipaul nta st of ions fere 6.3% d a fo m r Wo atch i rke nr 1 s99 6.3% 9 were offered a Automatic enrollment is relativelyI new and therefor nstitute (EBRI) is the only nonpr e only limited empirical information exists to asses ofit, nonpartisan s database at y “saver School, Univ at 3 percent of salary these ret s,” or individuals who are m urns in ear-end 2000, which contai ersity any gi of Pen ve and a n year nnother 2 s ha ylvania, No ve public fluct o 2re i per poli uat n v ns inform e cent of plan clined to save. e d cm y r bet beer 9, 200 w search een atio -1and s with autom p n on actual 401(k) pa 1. ercent edu Thus, a new projection cat aion on nd 14 ati p c enrollment chose 2 perce econ ercent om.i rticipant account balances c securi scenario as ty and emplo sumes that if ynee t of salary 66% benefi at their t is sues. income from continued em 31% ployment. The EBRI/ICI projection model in this report only focuses on the income future 3.8% 63% (Initial Asset Allocation Preserves 401(k) 3.8% replacement r Pence, Karen M. "Nature or Nurture: Wh likely to participate in a 40 ates among al $500l eligible workers wit 1(k) plan $500 on thy eir own. Do 4 hout $500 01(k) The automatic enr Participants Save Differen refore, adding autom $500 ollment. The atic me odel analy tly than Other nrollment cre zes two a Workers?" tes a larger includes a cross-section • 16 Whether many individual of pension f s’ 401(k) plan acc unds; busin umulations wi esses; as ll pro59% vidsoc e signi iations; lab ficant incom oe r unions; h in retiSalary remente has alth $3,000 2% match on2030 and 2039, by Incom up to at least 6 Turni png 6 ercen 5t of salary or m Betw e e Quartile at Age 65 en 203o 0re. and 2039,.................................................................................. by Income Quartile at Age 65 18 EBRI’s membership includes a cross-section of pension funds; businesses; trade associations; current em these workers find them (Figure 5). 28 how it would ploy While this is gr affect particip ers, asset all selves without 401(k) plans, o ation rates, average cont eater than the zero percent c cations, loan balances, an ribution rates, and average as th d annual incomes (Figure 2). Participants are then ey ontributi would att on r em ate that non-participants choose, these pt to replicate their 401( set allocations over an k) savings retirees are projected to receive from 401(k) accumulations in their first year of retirement. This assumes that the plan23% allows catch-up contributions. PSCA (2004) reports that nearly all member plans allowed organization committed to original public policy 54% Allocation) different default contrib Finance an percentage of new participants from becom d Economics Discussion Series Paper e a publi uti c policy concern in rece on rates—3 percent of salar this group nt yea . Th . Washington rs. e i yThe an md 6 p va act of automatic enrollment on hi lid percent of salary—and two dif ity of , DC: Board of Go such a concern canno vernors of the t be assessed b fgher erent default income Federal y looking 53% care providers; insurers; banks; mutual fund labor unions; health care providers and insur s; government organiza ers; government organizations; tions; and s and service firms. ervice 18 Quartile 1 $2,000 (percentage of final five-year average salary) entire career. The EBRI/ICI m 51% odel must also know how to estimate which employees and how long forecast to engage in activity in 401(k) plans over the automatic co experience wi Copeland, Craig. “E ntributi th contributions to IRAs. Based on job on rat mployment-Ba es generally sed Retire are lower than av ment Plan du reration behavior observed in the Surve erage contributio m Participation: Geographic ainder of their projected careers. A n rates of 401( Differences and Trends.” k) part sy icipants in th participants of Consumer e 5 See Fidelity (2004) for the full range of age and income groups 26 analyzed. 16% catch- Figure 15, up contri Int butie ornal Revenue Code Traditi ns in 2003. Utkus and Mottolonal IRA Contributi a (April 2005) report ton Li hat 86 mits, 2001–2008 percent of 401(k) ................................... plans in Vanguard’s 19 The income at th replacem e 401(k ent rate is the ) accumulatio portio ns of tod n of apre y’s -retirem retirees beca ent incom use te h es that a 401(k) e individualplan pa s have not rtic ipant is participprojected to ated in 401(k be ) pl ans asset Reserve Sy quartiles proves les allocations—a ste 1%m, June 2002. money m s dramaatic and, in some c rket fund and a life-cy 2% 3% ases, di cle fund. minishes repl 4% acement rate 5% s because thes >5%e workers tend to firms, including actuarial firms, employ ? About EBRI ee benefit consulting firms, law firms, Quartile 2 research and education on economic security and 46% $1,000 employees will rem None ain wit 1–5h the default 6–10choices. For this 11–15 set of si 16–25mulations, the 26–35 model’ 36–39 s automatic enroll 40 ment age, their behavior changes and reflects t EBRI/ICI dat Finances (SCF), participants in the EBRI/ICI 401(k) EBRI Issue Brief 19 abase (Figure 6). In addition, in m 274 (Employee Benefit Research Institute, October 2004). heir own any personal characte cases the defaul Accumulation Projection t contribution rate in the automatic ristics comb Model t ined with the typical ypically are projected recordkeeping system offered catch-up contributions in 2004. throughout their working years. able to replace by draw $32,000 or Less ing from his or EBRI’s work advances knowledge and unders her 401(k) accum >$32,000–$53,000 ulations at age 65. The mtanding of emplo edian replacem More Than $53,000 ent rate is the yee benefits and their point To analyze 2001 42% replacem 2002 ent rates after a full ca 2003 reer 2004 with exposure 2005 to 401(k) plans 2006 , results for a s 2007 ubset of th2008* e entire model For eligible participate when left to enr workers born between 1965 oll on their own. Higher in and 1974, the im com pact of a e workers tend to have full career with em higher partic ployers offering ipation rates, 22 17 accounting firms, and investment management firms. Quartile 3 | 40% 67% behaviors obs enrollment plans is lower than the c to work at several different em assumptions are based on an analy erved among millions ploy sers o is by Choi, La of 401(k) participants at different ontriv bution er the course of their careers. By rate needed to take full advantage ibson, Madrian, and Metrick (2001 and 2004) ages, tenures, and income levels in the age 65, 9 of the em percent of the 401( ployer m of data for atch. k) 29 th EBRI importance to the nation’s economy among policymakers, the news media, and the public. It where half of 401(k) plan Source: Authors' summary of U participants .S. Internal in a emplo R given inc evenue C yee benefits. ode. o Default Contribution Rate me group will be able to replace more than this amount and half database are often highlighted in this report. There are about 0.6 million 401(k) participants in the model database that ? Benefit automatic enrollm Ho Profit Sharin contribute m lden and Van o g/401( D re than 3 percent of salary ent with erhei (Nove k) Cou | a 3 percent of salary m ncil of America. ber 2002) and th , and select e m 47 cont o Annual Survey of deri l scen bution moari re aggressive rate and a m os presenProfit Sharing ted i invest n oney this repo market fund va ments i rt assu and 401(k) Plans: Reflecting n the absence of autom me that th ries fro e lim m it an atic • The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) have Years Out of a 401(k) Plan After 2000 Employee Benefit Research Institute 63% 35% Quartile 4 Salary Group (percentage of salary deferred) a health services company with approximately 30,000 employees. EBRI/ICI dat participants with account balances at y Engen, Eric M., William abase. G. Gale, and Cori E. does this b ear-end 2000 y conducting Uccello. “The Adequacy and born bet and publishing policy re ween 1965 and 1974 are pr of Household Saving.” search, analysis, Does the Employer and ojected to have special reports on Brookings * After 2008, traditional IR |A contributions are indexed for inflation in $500 increments. IRA catch-up contributions are not indexed for will replace less than this amount. • wereEBRI does not take ad born be 59 tw %een 1965 and 1974 vocacy posit and drawn fro ions on m the EBRI policy proposal /ICI year-end 200 s, lobby for 0 database. Th or against e procedure to create increases legislated in EGTRRA continue throughout the projection. co 2001 llaborated to deve 2002 lop the EBRI/ICI 4 2003 01(k) Accumulatio 2004 n Projection Mod2005 el. This model exam 2006* ines how increase of 1 E 2003 MPLOYEE enrollment. Plan Ye 4 percentage points in the ar Experience. Chicago, IL: Profit Shar median replacemen ing/40 t rate f 1(k) C or those in the lowest income quartile at ouncil of America, 2004. age Social Security 401(k) Accumulation* Social Security and 401(k) Accumulation* 57% EBRI’s overall goal is to promote soundly con- | employee benefits issues; holding educational briefings for EBRI members, congressional and W inflati hat we do on. 56% The health services co Fundamentals mpany implemented an automatic enrollment program on April 1, 1998, that Offer a Plan? had onl Papers on Economic Activity In addition, t y one job their entir he model ale career; about 54 so factors in behaviors t . Vol. 2. Washington, D percent had ypic C: Brookings al at job change (Figure 2). First, the m three to fi Institution, ve jobs; and a December 1999: pp. 65–188. bout a quarter had six to odel 6 eligible non-participants added about 0.5 million eligible non-participants to this birth coho54 rt i %n the model. The Table of 54% Contents 30 Source: EBRI/ICI 401(k) Accumulation Projection Model. proposals, or recommend specific approaches Source: Profit Sharing/401(k) Council of America (PSCA), 401(k) assets might contribute to retirem 47th Annual Survey of Profit Sharing and 401(k) Plans, Reflecting 2003 Plan Year Experience. ent income for fut /prescriptions. EBRI does provide objective ure retirees based on decisions workers make Social Security replacement rates show t | he reverse pattern: for the lowest incom 52% e quartile, Social Security is projected Eligible Non-Participants 65 to a B ENEFIT On the other decrease of 4 percentage points in hand, the second autom the median atic enrollment scenar replacement ra io in Figure 1 hi te for those in the highest income ghli 52%ghts projected results if the federal agency staff, and the news media; and sponsoring public opinion survey 35 s on employee ICI resea 51% rch Source: Authors' tabulations based on Choi, Laibson, Madrian, and Metrick (2001). into IRA catch-up contribution activity found that households taking advantage of catch-up contributions 1 determ nine jobs (Fi applied to employ ines Experience from 2001 through age 65 among 401(k) participants with account balances at year-end 2000 and born between 1965 and whether an indi Source: EBRI/ICI 401(k) Accumulation Projection Model. gure 12). As a result, because ees hired on or after that date. The defa vidual changes jobs in an many em “To contribute to, to encourage, and pl y oy given ers do not ult contribution rate was initially year. If offer a 401(k) he or she doe plan, s, the m onl odel 1974. set at 3 percent of y 7determ percent of ines participatio Source: Authors' summary of U.S. Internal Revenue Code. n rate for this bi | rth cohortceiv is 54ed emplo percent at thy e ee benefit programs. EBRI does not beginning of the projection and 74 percent by the end when throughout their careers and finds that the median replacement rate from 401(k) accumulations depends Introduction and to replace a data on, and analysis of, the range of identified options in bout 52 pe Summary rcent of ....................................................................................................... pre-retirement income, while the highest income quartile is proj order to provide others the ected to ..................... have Social 3 quartile (Figure 10). The replacement rates rise for th To project the i Thaler, Richa plan sponsor 2 selects as the rd H., and Shlom mpact of autom default a 6 percent contributi benefit issues. a otic Benart enrollment on 401( zi. “Save EBRI’s Ed More Tom e lowest two income groups because the ucation and Re k) accu on rate and orrow™: Using Behavioral Econo muse lat ar ions at retirement, the EBRI/ICI c a life-cy h Fund (EBRI-ERF) performs cle fund that invests in equities effect of mics to the char mit odel able, toR IR ESEARCH As did so to the lim ? it (see Ho Fellows lden et al. (February 2005)). Thus, it was assumed that 401(k) plan participants * The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. Percentages do not add to 100 percent because of rounding. * After 2006, these limits are indexed for inflation in $500 increments. | 45% salary there is and the no au initial defaul tomatic enrollm t investment fund was a ent. With automatic enro m lloney ment, m tha e rket fund. Em participation rate ploy for t ees were given 30 da his group is 91 percen ys t at th to e whether the individual leaves the 401(k) balance in th participants born between 1965 Fidelity Investments. Building Futures, Volume V: How Workp and 1974 were projected to have 4 e previous e lace Savings Are Shaping the m 01(k) plan ployer’s pla con verage for their entire careers , cashes it out, or rolls it Future of 43% primarily on whether current participants will continue to work for employers sponsoring 401(k) plans. For Security replace only about 16 perce educa nt of tiona sala l, and ry. (See scientif Hol to enhance the development of sound ic func den antidons of the Instit VanDerhei (N ute. EBRI ovember-ERF 2002 is a tax-ex ) and discempt organization ussion below.) EBRI/ICI 401(k) Accumulation Projection Model ......................................................................................6 Introdu opportunity to make more ction an | d Summar informed decisions y than might otherwise be possible. m m increasing participation rates for these e a uki st first produce inform Increas when the worker is young ng catce E h-um p co ploy ntri ee Saving.” butioat nsion for co and rebalanc ntri Journal of bnon- ute t lobb hparticipants e entire am mploy y or endorse specific appr es to be m Political Economy ees ount allowed. m . To generate non-participants, the m oo re re than offsets the potential downside of reducing concentrated in fi . Vol. 112, noaches. Rather xed-income secur o. 1, Pt. 2 (200 odel uses 4): S1 , it pro- ities 64–S18 as the worker 7. INSTITUTE 40% ® beginning of the projection and 97 percent at the end. opt out of the plan. The employer match rate for the plan was 50 percent of up to 6 percent of pay after one Retirem over into an IRA. If a rollover IRA is cr (Figure 13). ent. Boston, MA: F example, the lowest in | idelit supported b co y Invest me quartile p eated, then ments, 2004. y contributions articipan typical IRA be and g ts turn 37%rants. ing 65 b haviors are etween 2030 modeled, including asset and 2039 are simulated to produce a Contributions? 7 ? How to Join EBRI Baseline Conclusions Model Results ..............................................................................................................................6 31 participation contribution rates and/or investing m ages. In this scenario, Over the past quarter century, ther behavior by age and income to esti median replo acement rates at age 65 are projected to be hi re e has been a shift in the pension conservatively. In contrast, em m employee benefit programs and ate a participation probabilit ploy landscape in the United States toward ees in the highest income quartile y for a given 401(k) participant gher among all eligible A life-cycle “fund” is a pooled investment portfolio, such as a mutual fund, collective trust, life insurance separate | For example, Holden and VanDerhei33 (O %ctober 2001) find that only 11 percent of participants making contributions 20 vides balanced analysis of alternatives based on the allocation decisions and IRA withdrawal year of em When workers do not • EBRI is a private nonprofit, nonpartisan ploy medi m an re ent. place alway ment rat s have e of 2401( 5 pe activity. rcent k) plan cove if future c rorga a ove ge, replacement rates fall significantl rage nization est is only a raablished in ndom occurrence 1978. EBRI’s but 5 y1 c perce ompn ared t if each 18 Amount Contributed? Other research finds this pattern; for example, Copeland (October 2004) finds that participation rates in employer- Automatic Enrollment .......................................................................................................... | ........................8 in the m already account, U.S. Department of Labor. workers across all income quartiles th Because curr have odel. or other such high For exam pooled invest ent retirees’ participation rates even in the ple, m about half of ent, that re Em 401(k) accum ployee balances a an without auto Benefits Security Adm emu ploy lations are not representati wees in ay fr absence of au om th matic enrollment. equity sec eir 20s and inistration. u tomatic enrollment that there is very rities and i earning betw ve of what a full career wit Private P nto fixe een $30,000 a d-i ension Plan ncome securities as t nd $39,999 Bulletin, h exposure little he defined contribution plans and, in particular, 401(k) plans. At year-end 2004, about 43 million 401(k) plan were at the 402(g) limit (in 1999), b EBRI Issue B ut, among throse iefs n are period ot contriicals providing exp buting at the limie t, 52 rt evaluati perce ons of emplo nt could noy t ee benefit issues and have done so ? Media sound public policy through subsequent job is covered by a 401(k) plan. The highest income quartile for that generation has a similar As it is designed to do, automatic enrollment dramatically increases participation rates, especially among Hewitt Associates. with the baseline m In order to analy Education a Quartile 1 2005 Tr ze a full career working at em odel that assu nd Research Fund (ERF), whic | ends and Exp Quartile 2 mes continuous coverage. erience in 401(k) Plans ployQuartile 3 ers with 401( h performs the Institute’s charitable, For exam . Li k) plans, the baseline results ar ncolnshire, I ple, in the l Quartile 4 L: Hewitt Associates, LLC, owest income quartile at age e presented All sponsored plans (whether defined contribution, defined benefit, or both) tends to rise with income (and education) and 1 2 Eligible Non-Participants .................................................................................................. facts. Through its activities, EBRI is able to fulfill its ........................8 target date—usually the expected r 23 e% tirement date of the individuals investing in the fund—approaches. participate in the 401( to be gained Abstract of 1 to 40 1(k) pla by increasing participation. Rather, pr n 999 F s might generate at retirement, EBRI a k) pl orm 55 an when eligible (Figure 4) 00 An trends, as well nual Reports as cr. Washington itical analy ojected replace . Thus, for ea nd ICI develo ses of , DC: U.S. Departm emplo ment rates are r ch 401(k) yee benefit po ped a m pla odel to licies an ne e participant i nt of Labor, duced by sim d proposals. ulat automatic e se S n his or EB u veral projecte mmer 2004. RI Notes her is a d because of formal participants had accu plan-im 23 posed mulat lim ed $2.1 its. PSC trillion in plan assets. A (2004) reports that 8.6 pe Neverthel rcent of t ess, whether heir member plans limit the many individuals’ 401(k) | disparity: a 30 percent replacement ratio in the non-continuous coverage situation and 67 percent if coverage is newer e with ag mplo e thro yees. ugh ag Autom e 54. Choi et al. (2 atic enrollment also has an im 001 and 2004) also fin pact on d that pthe distributio articipation tend n o s tfo 401(k) rise with tenu plan participants’ re. Although no 2005 for participants who were born betw 65, the . educational, and scientific functions, is a baseline replacement rate from een 1965 401(k) accum and 1 objective research and education.” 9u 7la 4tax-exempt 501(c)(3) organi (and th tions in the us were be first year of r tween 26 and 3 etirement is about zation supported 5 years old in 51 2000) | 8 Replacement Rates Am Quartile 1 ong All Eligi monthly Quartile 2 b period le Workers ical providing cu ............................................................................... rrent information on a variety Quartile 3 of employee b Quartile 4 enefit topics. ......8 enrollment’s l retirement scenarios for a group ower contribu ? Members Only tion rates and/or of 401(k) plan pa more cons rtic ervative invest ipants born between 1965 ment strategies. and 1974 after essentially a 20s with $3 cont plan accu Catch-Up Contributions ributions0, o m 000 t f u hi lations will provide signific gho ly $3 com 9,9 p9 ensat 9 in salary, an identical no ed participanta s nt incom by plan de e n-participant si in gn retirement has beco . is created for the analy me a public polic sis. At y y concern in ear-end The life-cycl co e npat tinuo tern us. of savings suggests that older individuals are able to save at higher rates because they no longer mission to advance the public’s, the media’s, and contributi tenure ef on r fect a i tes. Choi et al. (2001) fi s modeled be | cause the part nd ic that, pri ipation deci or tsi o autom on in tha etic model enrollm is onl ent, the y made at m j oo st co b cha mmon contri nge, the model buti assum on es and would percent of projected pre-retirem be turning 65 years ol ent income. This is a d between 2030 and bout 2039. The “401(k) halved to 25 percent of projected p accumulation” at the end of the re-retirement by contributions and grants (it is not a foundation). EBRI’s Pension Investment Report provides detailed financial information on the universe of EmO pirical ur Research on Automatic Enrollment ........................................................................................ 12 2000, the tota 32 The autom U.S. Social Security full career’s exposure to The Econom a l population tic enrollment scenario featu ic Growth and Tax Relief Reconcilia Adm of 3.8 m 40 inistration, “P 1(k) plans. W illion eligible em rim ring a 3 orkers’ retirem ary Insurance Am perc ploytion Act of 2001 ( ent contribution rate and a life-cy ees consists of 2.5 m ent savings behaviors are shaped b ount.” Available: EGTRRA) in illion 401(k) www.ssa.gov/OACT/COL troduced “catch-up” cle fund plan participants y plan design and increases A recent years. The validity of such a concern cannot be assessed by looking at the 401(k) accumulations of face the expenses of buying a | home and/or putting children through college. An augmented version of the life-cycle End of Projection (At Age 64) PSC that once a A (2004) n i rep ndividual orts that bec 9.3 o pe mes a particip rcent of plaa nn s l t he im o ited co r she c nto ri nt bi unue tions s t o o pa f hirt ghl iciy p c ato e w mph ensa enev te er d em offere ploy d a ees whe plan frn om that first • This report builds on the model scenarios presented in Holden and VanDerhei (November 2002). It presents rate was 6 percent of compensation, which was th defined benefit, defined cont e maxim ribu ution, and 401( m amount mk) plans. atched b EBRI y the em Fundamentals of ployer. Among Employee Holden, Sarah, Kath indivi income when dual’s career is the su 401(k) ? y coverage is not Ireland, Vick Programs m of all 401(k) balances y Le continuous and no other plan i onard-Chamat bers, their em and Michael Bogdan. “The Indivi ployers as s allowed to take its place ( well as IRA balances resulting dual Retirement Figure 14). Rebalance Portfolio Asset Allocation policymakers’ knowledge and understanding of em- Site Map Search | Automatic Enrollment in the Projection Model ...................................................................................... 12 th with account balances and 1.3 m projected me eory pred tax polic /piaform contributi icts th ula.h ydian replace ons, , as at th t so that indi well as individuals’ i mle . Accessed 6/2 optimal sav ment rates viduals age 50 iillion non- ng7 s /05. at age 65 across pannate personal characteristi ttern in participants, which results in a pa or older creases a w coul ll incom ith a d m ge. aFor a ke e qadditional tax- u cs. sum artiles co mary discussi m rticipation rate of pared with the scenario with deferred contributi on of life-cycle 66 percent at m ons to odels, se out e today’s retirees because these individuals have not participated in 401(k) plans throughout their working cont poi ributions nt of part reached the icipation o m nw axim ard.u m allowed by the nondiscrimination tests and another 18.8 percent of plans returned new scenarios that exam Benefit Programs ine the role that 401(k) accum offers a straightforward, b ulations m asic exp ight play lanation of in retirem emplo ent by analyzing c yee benefit programs in ertain | Figure 10 employees with less than two years of tenure hired after the automatic enrollment program was implemented, Account at Age 30: A Retrospective.” from Replacement any rollovers from rates fall even m 401(k) account ore as income rises. Fo ICI Perspe s. The model ctive. r converts the 401(k) accumulations into individuals in the highest income quartile, not alway Vol. 11, no. 1 (Investm (Changes as Participant Ages) ent Company Ian incom nstitute, e s 19 Autom EBRI publications atic PROGRAMS TO MEET THE MI Enrollment P rojection Results .................................................................................... SSION ...........14 74% Browni automatic enr qualified retirem This report exam ng and Crossley (Su ollment (Figure 10). This r ent plans and IRAs abov ines the i mmer 2001). For a m nfluence of autom esult is driven e the defe ore exte atic nsirred v enrollm by e discus t contributi he equit ent in the sion, see y returns in t on Enge lim plan design on replace its. This tax polic n, Gal he life-cy e, and Uccello (Decem cle fund, because y chan ment rates a ge ber mong the start of th years. e projection m | odel (Figure 7, top panel). 1 2 excess contributions to p ? aPublications rticipants after t the priv plo h ate and p e p ylee benefits and their impor an year end ublic sectors. All Eligible Workers ed. EBRI Databook on Employee Ben tance to our nation efits is a statistic ’sal reference 21 factors that influence outcomes for 401(k) participants, including: plan design, through automatic enrollment; 72 percent contributed at t Median Replacement Rates From 401(k) Accumulations he default contribution rate of 3 percent. for All Eligible Workers February stream—an annuit having a 4 Particip 200 01( ation 5). k) plan reduc do y, or set es not im es their of installment pay ply conm tribu edian replacement rate b tions in m ev ents—usi ery year to Figure 14 ng current li the y4 3 01(k) 7 percentage points. fe expectancies at age 65 and pro plan, but that the contribution activity will b jected e 20 27 Figure 12 19 Catch-Up Contributi 99). In addition, Mitons chell and ........................................................................................................ Utkus (2003) discuss life-cycle savings and behavioral finance model ..................... s in the cont14 ext of volume on employee benefit pro Figure 6 grams and work force related issues. equity Participation rates tend to rise with age and incom Utkus, Steph all eligible workers. Becau • encourages increas securities have historically EBRI’s com en P. pA Recent Successful Test of the SMarT Program rehensive program of ed savings by se many had individuals at a point em higher return ployees do not resea s than fixed-inc erch and dissemination covers health, (F Figure 4 igure 4). choo in their lives se to par o As the popu me secu . Valley ticipate in 401(k) plans, non-participants when increas rities in the United States. Forge lation ed , PA: The Vanguard Center of all eligible saving is possible (e.g., 33 The Employee Benefit Research Institute (EBRI) a (401(k) participants and eligible non nd the Investment Com -participants) pany Institute (ICI) have tax policy, through catch-up contributions; and individuals themselves, thro ugh saving in IRAs when not 98% 98% Baseline (401 (k) Plan P articipants Turning 65 Between 2030 and 2039, by Income Quartile at Age 65 A ll Eligible W97% orkers (401(k) P lan A utomatic Enrollment (3% Automatic Enrollment (6% 97% Utku Choi et al. (2001) find similar results wi model s and ed aft Mo etto r th la (Ap e contrri il b200 utio5) also n activ i find ty obse that p th resp rved articip am ect to asset allocatio ong ants 4with 01(k )h pl igh an er hou partic seh n before and ipant olds in wi co thmes are m acafter auto coun1 t bal ore likely to am nces ati i c n a tak ny gi e ven discount rates. The replacement rates The question that arises is: Median Replacement Rates From 401(k) Accumulations* To what extent could IRA economy calculated co . mpare the inco contributi me or installment pa ons make up for a lack of 401( for Participants yments generated in k) 95% 8 3 retirem ent plan design considerations ? What's New . Average Participant Before-Tax Contribution Rate, Saving in IRAs When Not in 401(k) Pla Distribution of Number of Jobs Held Over Projected Career ns ................................................................................................ 16 401(k) Plan Participation Rates, by Selected emAutomatic en ploy for Retirem were added t collaborated to develop t children are educated and gr retirement, and related economic security ees moves through oOn ffe lyen r )e o rollment with a 6 percent contribution ra d t Research and The Vanguard Group, N the m 401(k) odel to analy plan their career hP s. e EBRI/ICI 401(k) Accu artown; house icipantze the i s an s, the probabilit d Eligible has been purchased). mpact of au Non- Cy th m ont tomatic enrollment on replacement rates u to rite ovem lation Projection Mo bat an em ut pics. This program includes policy forums, , regardless ion R b at er 2002. e; M plooy ney ee will choose to participate in the of the default M arket C del. ontribu This tiinvest on Rm ateodel examines how ;m Life ent, is projected -Cycat retirement. le Fund) 10 (percentage of final five-year average salary) adva year ntage . A o nf alysis catch- oup f EBRI cont/I riCI 40 bution 1(k s. T ) h pey lan p discern articip cat anch ts in calen -up contd riab ru -y tiear on ac 2000 f tivity ind across s that 91 part per icipcen antt s o wh f po arare ticip 50 an o ts r ol hade d r Turning 65 Between 2030 and 2039, by Income Quartile at Age 65 enrollment. Only 18 percent of participants with less than two years of tenure hired prior to automatic 88% Holden, Sarah, and Jack VanDerhei. “4 the first y coverage? The m ear of retire odel assumes IRA ment to the projected Contact EBRI contributi 01(k) Plan As final five-y Publications, (2 ons onlset y ear average pre-retire as a substitute for the 401(k) activit Allocation, Account Balances, and Loan Activity 02) 659-0670; fax publication ment incom orders to 2 e. y ty (20 picall 2) 775-6312. y in 9 by Selected Participant Age and Salary Groups, 1999 Participants) Fund) Participant Age and Salary Groups, 2003 Conclusions ................................................................................................................................................19 to im Em prove outcomes for all incom A new EBRI/ pirical research finds that automatic ICI model scenario captures this by assum (percentage of participants at age 65 between 2030 and 2039) e groups (Figur enrollment is Since its inception, EBRI’ e 10). The com succes ing that all 401(k) sful at increasing participation rates, which bination of the s membership has participants age 50 6 percent default or older who 401(k) For 401(k) assets a co plan round tables, briefings, mplete d when offered increases. Thus, each ti e might scription contribute to retire of the mo testimony, intervie del, see Ho ment incom lden an me d a non-participant changes jobs, the m V e fo anD ws, and speeches. Major studies in process r futu erhei re retirees based on decisions workers (November 2002 and Novemodel deter ber 2002—mmake ines in al cont l inc ri •o b m ue t iA gro ons new EBRI/ICI m i un pts: o f th oei r exa r 40 m 1pl (k odel scenario e, 5 pe ) accou rcen nts t(em of dem pa plo rt onstra yiee, em cipant tes that th spl age oyer, or both) 50e e orffe old cts of aut er a in nthat d ear oyear (see Hol m ni an tic enrollm g less than dent on en $5and Va 0,000 replacem m nDe ade cat rhei ent rates at ch- (percentage of final five-year average salary) enrollment had all of their 401(k) Subscriptions to balances in the m EBRI Issue Bri o 81% ney me afs rket fund (which becam are included as part of EBRI e the default fund under membership, or as part of a 2003 observed. Thus, the m ,” ICI Perspective, odel Vol. uses the 401( 10, no. 2, ak) contribu nd EBRI Issue Brief tion decision va 272 (Investm riables to deter ent Com m pany ine wheth Institute and er the (percentage of salary contributed) (percentage of eligible employees participating in given age and salary group) References .................................................................................................................... 57% .............................. Loan Activity? 20 9.3% contributi Ap whether he or she will participate in the new 401(k) pe Utkus, Stephen P., and Gary m are projected to contribute at the lim ndi oves x) Quartile 1 on r . many ate and the life-cy employees from cle fund R. a Mottola zero co it in produces the ntributi . a given Catch-Up Contributi on rate to a positive y plan based on t ear highest replacem also make the ons i he indivi contribution ne additional catch-up contribution. The 20 nt rates at 04: dual Pla ’s new age an retirement am nrate. Sponsor and Participant d new income ong the four throug include Social Security hout their careers: whether or not reform, individual to participate in the 40 investment education and results, health 1(k) plan, what amounts to contribute, h 76% 56% 63% ow to up co (N nt ori vem butb iret o en r 200 isrem in 2) 2 ent 0). Sim 0 dep 4; 7 e ilar pe nd rcent hea ly, an v of ialysis of ly t o hose e n the de EB arni fa RI nul g /I $ tCI co 50 40 n ,0 tri 0 1( 0 but k) to ip o $7 ln an 4, rat p 9e a 99; a rticip n 1 d2 de ants d pe fa rcent ultr i awn nve of t stm fh ro om see ear nt th opt e ni 1i999 n og n t $7 d ha at 5, tab t 00 ha e 0 t se f pl oa in nd ss th pons at or $199 annual subscription to EBRI Notes and EBRI Issue Briefs. Individual copies are available $20,000–$40,000 74% grown to represent a cross section of pension funds; 9.0% automatic enr Now it’ ollm s easier than ev ent). This figure increased to 71 per er to find excent for those hired after automatic enrollment was actly what you’re looking for with our Baseline Model Results Em indivi ploy dual contributes to a ee Benefit Research Institute, A n IRA when without access to ugust 2004). a 401(k) plan. Because IRA contribution limits are Repayments? Endnotes Source: EBRI....................................................................................................................... /ICI 401 (k) Accumulation Projection M odel. ...............................22 10 automatic enr at the time of job change. I allocate as Adoptio model forecasts that individuals in the highest incom Lower inco Quartile 2 n. Valley o set llm s, whether to tap assets pri me individ ent co Forge, P mbninations analyzed. addition, as long as the uA als benefit the most from : The Vanguard Center for Retirem with prepaymo er to retireme nt for $25 each (fo cu au rrent em e n quartile when the to t, and whether to preserve matic enrollment. However, am r printed cop ploy ent Research an er offers a 401(k) plan, any em ies) or for $7.50 (as an e-m y reach age 65 generally would d The Vangu assets when changing jobs ong hig ailed ard Group, A ele ploy hc etroni r income ee c file have p ) ril . $9992 ,99 pe 9insurance coverage, health policy reform, pe ; rce 18 n p selects. For t te o rcen f pat rt oif c tho ipant hs e lo e ear s m west in an de em ing $10 co pl m oy 0,000 e qu ee co artile elig to $12 ntri $20,000–$29,999 bu 4,999 tiib ons le wo ; in t 22 p rk hns at year e ers turn rc ion design a en$30,000–$39,999 t of (see in t g 65 ho Holde se earn between n n a d investment trends, and ing nd V $1 2030 a 25 nD ,00 an erh d 203 0 to ei (O $1 9, th ctober 24,9 e m 99 2 e ; an 001 dian d 32 )) . Orders/ >$40,000–$60,000 8.5% The 401(k) distributions are not indexed for in20% flation over retirement, while Social Security p 58% ayments are. In addition, 1 57% lower than 40 installed. The baseline case of the 1(k) plan contributio model takes the 401(k) n limits (Figures 11 participants through a career wit and 15), 57% individuals m 8.3%ay not be able to h continuous contribute as In all four simulations presented in this figure, workers experience continuous employment, continuous 401 (k) pl 21an coverage, and investment returns 8.2% extensive searc | h engine and site map. Just type in the keTake Out Loan? y words 56% 67% businesses; trade associations; labor unions; health care by calling EBRI or from www.ebri.org. Change of Address: EBRI, 2121 K Street, NW, Suite who previous per c e 2005 higher projected replace en mt ploy o. f th ees, conservative default investment options replacem ose earn ly participated in a 4 ing ent ra >$60,000–$80,000 $150,00 tes from me 0 or nt rates as a r 401(k) acc m 01(k) ore. plan contin um esult of ul $50,000–$74,999 ations increa ues to do so i takin and m g advantage o se from 23 odest d $100,000 or more n the future. e perce fault contribution rates in f catch-up contributi nt without a By the end of t utomatic ons. en he projection rollm some ent to 37 cases have Holden and 22 Quartile 3 61% VanDerhei (November 2002) present results from this comprehensive model, which projects the 54% if the indi analysis of vidual elects a set 401(k) participant behavior. Ma of installment payments rather thanjor surveys include the annual Retirement an annuity, the amount that may be reasonably based on historical returns from 1926 to 2001. In the baseline, only 401(k) participants with account balances at year-end 2000 ar Quartile 1 e considered. In the Choi et al. (2001) also study two other large companies’ 401(k) plans, in addition to the large health services While the combined im |pact of a lower-than-ty 18% 46%pical contribution rate and a conservative asset allocation ________. “ e m m uploy ch as they ment, continuous 401(k) plan C want, or are a an 401(k) Accu ble, to contribute. The m mulations Generat coverage, and historical financial 52% e Significant Income for Future Retirees?” odel assumes that each individual tries to contribute to market returns (based on U.S. ICI Perspective, 7.6% 600, Washington, DC 20037, (202) 659-0670; fax number, (202) 775-6 52% 312; e-mail: 52% percent for automatic enrollment with defaults of a 3 percent contribution rate and investments in a money 34 7.4% 90% 90% 90% m oth odel, 76 percent of all eligible workers are participat e a negative effect if the e r three scenarios, all eligible workers m ap reloy conee would sidered. have contribute ing in a d at a highe 401(k) plan at age 64 (Fig r rate and/or chosen a less c ure 7, bottom onservative panel). withdra portion of pre wn each year after the -retirement inco | first year mand le e m that reti ay vary as 89% t us do t rees future might market fluctuat re he w place in their first y 7.3% ork fions or y affect ou. ear of retire the account goi ment with 401(k) ng forward. Quartile 4 11 50% 43% 43% subscriptions Confidence Survey an 59% d the Health Confidence Survey. providers and insur 7.2% ers; government organizations; and Fo co r e mx pam an Change Jobs? y (th ple, Pence at was i (J nune itially an 2002) alyzed finds t in hat Mad 401 r( ian k) and plan pa Shea (May rt 16% icipants 2h 000 ave )). C greater in hoi et al. (20 terest i04) co n savin ng si co der 11 mpared with large companies 7.1% Quartile 2 will offset at least some of the benefits of the increased Publications Subscriptions@ebr participation i.org. Membe rates associat rship Information: ed with the adoption of an Inquiries regarding EBRI Vol. 8, n financial the IRA what would have 2 om . 3 arket experience fro , and EBRI Issue Brief been contribu m 1926 t 251 ted b h (Invest roug yh 20 the empl ment Co 01). oy m In this baseline case, repl p ee and e any Institute and Employ mployer combined in a 48% ace ee Benefit Research ment rate given y s at age 65 ear in the 4 The 401(k) accumulation includes 401 (k) balances at employer(s) and rollover IRA balances. market fund. The m | edian replacement rate for this group increases up to 52 percent when the default 6.8%83% 6.8% Next, with bo 11 invest Utkus, Stephen P., and Jean A. Young. accu Saving in mm ulation ent option without IRAs When No th participant s, whether the 401(k) s and non- autom t in 401(k) aparticipants in th ti balances ar c en Pl Lessons Fro rollment. ans e held with em 6.7% e m m Behavioral Finance an odel, a range ployerof autom s or in roll a d tic enrollm over individual retirement the Autopil ent designs an ot 401(k) Plan d . othe with r work 401(k) p ers; anld Ipp ans im o54% lito ple m (19 en97) argu ting a va es t riety hat firm of chang s the at o s (e.g ffer ., d au efin tom ed a co tic en ntrib roll u45% tion men tp , elig lans ib attract workers wh ility rules, sav81% ingo are sav s survey). ers. 45% 45% Figures membership and/or contributions to EBRI-ERF should be directed to EBRI President/ASEC Catch-Up Contributions Holden and VanDerhei (November 20 02) also consider projections for many diffe79% rent investment return scenarios Institute, Novem range from 401(k) account. However, if the total contributi automatic enrollm about b37% half to a er 2002). ent program |bout two-t , Choi et al. (200 hirds of pre-re 1) fin on tha tirem dt that the percentage of parti would have ent income. For exam occurred in the 401(k) ple, the median indivi cipants hired during Quartile 3 plan is higher than dual 78% contribution rate is 6 percent ser and life-cycle fu vice firms, including actuarial firms, emplo nds are used as th 51%e default asset allocation. yee • The Web-based EBRI Databook on Employee Benefits 77% and Fundamentals of Employee 43% 51% 6.2% 51% 51% 50% participant reactions are si Valley EGTRRA Given that many Forge, PA: The Vanguard Center for Retirem changed tax policy 75% indi m vidua ulated. ls change job by increasing contribution lim s and many 42% en e t Research and The Vanguard Group, A mployers do its and allo not offer 4 wing catch-up contributions for 01(k) plans to th peir workers, ril 2004. accounts (IRAs). 49% 35 23 Chairman Dallas Salisbury at the above address, (202) 659-0670; e-mail: salisbury@ebri.org | including: the worst 50-year return period for U.S. equities (1929 to 1978); a bear market (three consecutive years of 48% Figure 1, Me automatic enr dian Replacement Rates From ollment that remained at th 40% 33% e contributi 401(k) Accu on and asset all mulations for Workers Turning ocation defaults decrea 65 B sed substantially etween 2030 am the IRA li See The Econom ong future retirees reaching age 65 between 2030 Fo U.S r e . m x Depa am it,pl then the indi rt ic Growth and Tax Relief Reconc e, pri ment o of La r to au bo vidual can only contribute the IRA li tor, Em maticpl enr oyo ee B llme ent nefi , Cth s Sec oi iliation Act of 2001 ( etu al and 2039 ri. ty ( Adm 2001)i fi ni in t nd st mrat it t hh .e lowest income quartile is projected to i at on EGTRRA) in onl (Sum y ab m oeu r 200 t a th4 creased annual ir )d , whi of ne ch w em repopl rts t oyh ees (t at hr ee to Quartile 4 32% 46% 70% And, you can order many of our publications online — with delivery within Benefit Programs are regularly updated as resources. They are augmented by monthly • A second new EBRI/ICI m | odel scenario captures the impact of catch- 68% up contributions by assuming that all One new set older participants. This report exam it can be assu of scenarios e med that man xy a 401(k) plan participants mines the e ines ffect auto the impact m of catch-up contributions atiat y c enrollment, a plan design ear-end 2000 may not on r alway e feature, has on placement rates fro s work for an em m plo yer The model provides a baseline scenario that ages a group 37% benefit consulting firms, law firms, accounting firms, 44% of 401(k) participants in their late 20s or early –9.3 percent annual returns on equities) at the beginning, middle, or end Withdrawal Activity? Amount Withdrawn? of individuals’ careers; and a bull market (three 5.3% 29 pe five m rcent of onths private of tenu wage re) 12% we and salary re particiworke pating i rs nwere the 40 active 1(k) pl paan, rticip wh an ile ts in afted r eaut fino ed con matic enr tribu otio llm n p ent lan 87 s on pely, 14 rcent of pe ne rcen w t with increasi and 2039, by ng tenure. By the tim Income Quartile at Age 65 e that employees have 46 m ......................................................................................... 64% onths of tenure with this company, the ..4 ____ contributi see distributions from Availability ____. “ on l A of an IRA during lapses in 401(k) cove ippendix: E mits to 401( 401(k) accu BRI/ICI Accum k) and ot m her retirement plan ulations replace about ulation Projection Mod rage essentially s (including 51 percent of pre-retir el.” IRAs). In addition, EGTR restores the lower inco ICI Perspective. ement inco Vol. 8, no. mme in the first e RA perm qu3A artiles’ its | 11% Editorial B40 oar1 d: (k Dallas L. Salisbury, publisher; Steve Blakely, ) participants age 50 or older who are editor project . Any ed t views expr o contriessed in t bute at thh is p e lublicati imit in on an a gid th 62% ven ose o year al f the author so mas sh ke t oul he d EBRI Issue Brief studies (which provide in-depth analysis of a single topic) and monthly 401(k) accumulations at age 65. The projections suggest that catch-up contributions, which are available to replacement rates at retirement. Automatic enroll The Vanguard Center for Retirement Resear 30s at that offers such a plan. Inc year-end 2000 t 33% hrough a full ome replacement rates career to retirement ch. me Auto nt at changes the worker’ retirement from matic Enrollment: Vangu at age 65. The baseline scen 401(k) accum s decision from ard Client Experience ulations are dram ario assumes having to choose continuous atically . Valley consecutive years of +31.2 pe 48 hours! It’ rcent annual returns as easy as clic s on equities) at the beginn king a butt ing 24 , middle, or en on! d of individuals’ careers. 59% | were activ employ e ees were p participana ts in rticip bo atin th g d e in fi th nee d b plean ne . T fit and he im dpact of aut efined cont ori mb au tic enrollment tion plans, and di7 mperc inish ent es we with re i in ncreasi privat ne de g job tenu fined re (Investm Replace “catch-up” co y replacement r percentage sti ear of retirement (Figure 3). The m not be ascribed to the officers, m ent Co enta ll at the defaults decrea ntributions by individuals Rates A tes back to baseline mpany I m nong All Eligible Workers stitute, November 2002—A trustees, m results. This is because the 401( eem and investment management firms. sed to approxim dian indi bers, or age 50 or older and alread other sponsors of the E vidual i ppendix) at nely the highest income quartile at age 65 is projected to 30 percent. . mploye y contribu k) plan contri e Benefit Research 57% ting at the tax-deferred li bution am Institute, the EBRI Educ ounts among lower mation and it. For additional catch-up contribution. The model forecasts that individuals in the highest income quartile when they 23% 23% EBRI Notes (which summarize major data releases, public policy activity, and new Figure 2, Dia to participate Forge, PA: T participants who are age 50 or older and already lower when workers do not alway g to havin ram he Vanguard Group, Jul of Annual Growth Cy g to | choose not to s fi n y participate in a 401(k) cle of d 2 them 001. 401( selves cont k) Accu in 40 ributing at the m 1(k) pla ulations in the EB plan.n If an em s throu limit, pri gho ployee does nothi RI/ICI 401(k) m utari their careers. Another new ly increase higher incom ng, he or she e 12 employment and 401(k) plan coverage for the group’s entire working lives. It also assumes that as the group 9% 52% 52% 12 bene Resear gfi ivte pl nch Fund, th anat s oan in nl or y. their creasi staffs. ng pro Nothin pog her rtion e in is to be co of eligible e nstr m ued as an attem ployees wou pt to aid or ld elect to hinder particip the adoption ate with of a tim ny pending le e in the ab gislat sen ion, ce ro ef gulation, Am The EBRI/ICI 401(k) ong participants reac Accum hing age u 65 lation Projection Model’ between 2030 and 2039, t s baseline results present he real (in 2000 dollars) cu the median replacement t-off points for the income exam replace about 67 percent of income quartiles tend to be ple, in 2005, any parti pre-retirement incom c close to the IRA contribut ipant age 50 or older alread e using distributions from ion lim y contri its. Higher income quartiles are constrained b buting $14,0 401(k) accu 00 (the 402(g) mulati limit) to a 40 ons. 30% 1(k) y reach age 65 generally would have higher projected replacement rates as a result of taking advantage of catch- | 47% or interpretative studies). Accumru ulatio le, or as n Projection legal, accounting, Model actuarial, o .................................................................................................. r other such prof Today, EBRI is r essional advice. ecognized as one of the most ......7 is automatical participants’ scenario shows the effects of indi ly enrolled in projected replace the plan. The ment rate viduals’ em s. ploy taking advant er sets a default contribution rate and default asset age of IRAs when they are not offered 401(k) plans. ages they behave similarly to current participants at the same age, tenure, and income levels. 27% 36 automatic enrollment. Nonetheless, the difference in the participation rates between 28 7% the two groups is still 35 13 percentage quartiles are: first quartile—$36,700; second quartile—$56,400; and third quartile—$87,200. Thus, the highest income 23% | rates by income quartile at age 65 for 401(k) plan participants who had account balances 25% 25% at year-end 2000. ____ plan, could the lower IRA li See For com ___ Hol_. “ den make a catch-u p up C aris an co ontributi d on, the m m nt Van ri its, whi but De ion o rhei nodel also projects Social Secu s c Behavior of . h prevent them p contrib (November utio 4 20 01(k) Plan Pa n of an addi 0 fro 2 anm d N repli ovem ticating their 4 onal $4, rticipants.” brity benefits in t er 2002 000 –AICI Perspe ( ppe 01(k) contri Figure 11). ndix) he first y forc com tiv bu T e, tion ear of retirement. p h Vol. 7, n le EBRI/ICI etepossibil refereo nces . ities. For 4, and projection for al By EBRI l EBRI Members — check out the special password-protected area where you 14% Automatic E Finally,n a ne rollment in the Projectio w projection scenario anal n Model yzes the impact of contributing to IRAs when not offered 401(k) allocation. However, the em ____ poi This scenario With these assu nts aft ___e _. r 24 Au assu ttomatic Enr o 26 m mes part mp ont tions, the baseline scenario produ hsploy o oicipants contribute to IRAs llment: Benefits and Costs f te ees nure m . ay still choose either of Adoption in an effort t ces a not to me participate (opt out) or dian inco . o Valley replicate their 401(k) contributi m Forge, e replacement rate fro PA: The Vanguard Group, to set their own m 401(k) on EBRI Issue Brief is registered in the U. | S. Patent and Trademark Office. ISSN: 0887 - 29 137X/90 0887 -137X/90 $ .50+. 6%50 quartile at age 37% 65 has a real income of $87,200 or more. authoritative and objective resources in the world on com Figure 3, Me ponents ofdian Replacement Rates for Particip the EBRI/ICI 401(k) Accumulation Pro ants Turning jection Model 65 B . etween 2030 and 2039, by Income Issue Brief The baseline does not include the eligible workers w m design, replace exam odel exami • ple, in the highest inc EBRI’s Fellows progra no. 238 (Investment Co nes the i ment rate mpact of this incre s fr oom me quartile, the median Social Se m allows individual mpany ased saving opportunit curity fall as Institute areplacement rate im nd Em ho ha income rise s from the private sector, government, d pl not oy yee y . e s. The median t participated in their current em Benefit Research Institute, proves by individual in the lowest about 14 percentage October 2001). ployer’s points 5 • A third new scenario shows the effects of individuals’ taking advantage of IRAs when they are not offered | asset In order to f May plans. If em 24 experience, while considering IRA contri allocati 2001ons and contribution am . o ploy recast the i ees use IRAs during lapses in 401(k) mpact of automatic enroll ounts. bution lim me its. nt on a cove rage, lower inco broader population me pof workers over an entire articipants do not fall behind accumha ulation ve access t s at age 65 for each individual and repor o hundreds of EBRI publications and researc ts median replacement rates by incom h online! e quartiles. For 13 See Choi et al. (2004). In addition, Choi et al. (2001) find that workers with lower incomes are more likely to select plan byDid y Quartile at Age 65 ear- you end 200 read this as a 0. Inco ............................................................................................................. rporating pass-along? no n-participants Stay ahead of em lowers the ployee bemedian replace nefit issues with your ment rates for own subscr all age and ................. iption to EBRI 9 income quartile at age 65 is projected to when these workers Tech The m ni foundations cal odel assu ly, this is m cal es that an m , academia, and the media to underta a le ke I d t | hR e p A contributi y indi rimary vidual a insur see Social Se ons when wit ance am ge 50 or ountolde (curity replace about half PIA hout r who would ). Th 401( e P k) plans, but cannot reach the baseline result ke studi IA was cal have contribut es of econ culatof projected pre-retirement ed for t ed at the 402( omic security issues he individual g) limit in 401(k) plans. This scenario assumes participants contribute to IRAs in an effort to replicate their 401(k) Quartile 1 Quartile 2 Quartile 3 Quartile 4 All employee benefit issues—health care, pensions, and career, the projection model immediately implements Investment Returns the automatic enrollment behaviors observed in the Automatic en because contr Although projected replacement rates rollment appears to si ibutions to their 401(k) accounts tend gnificantly increase at age 65 incr to participation be ease across all i close to IRA li rates. The EB ncome groups when indivi mits, whicRI/ICI h are lower t modelh shows an 401( duals not k) example, among individuals turning 65 between 2030 and 2039 whose income is in the lowest quartile for | and remain with the automatic enrollment defaults. 2% Issue Brief for only $49/year electronically e-mailed to you or $199/year printed and mailed. For more information income groups at age 65 (com participant’s earnings history and d par ide n d with the baseline) ot consider the possibbecause curre ility of a spousal nt non-participants tend to benefit, which can be substan have lower tially larger Ibbotson the m income at age 65, while the (Figure 14). odel in any and work Associates. contribution experie given with EBRI te SBBI (Stocks, Bonds, Bills, and I year median individual in t (after 2001), nce, while conside ams on major projects. will also ring h m IRA c e hi ake a catch-up contributi nghest incom flation) ontri bution limits. Althou 2002 Yearbook: e quartile is projected to have a Social on gh Market R of the entire am projected replacem esults for 1926– ount ent rates at Figure 4, 401(k) Plan Participation Rates, by | Selected Participant Age and Salary Groups, 2003 ................9 sam lim ple health services co its. On the other hand, I mpany RA contributi analyzed by ons duri Choi et ng la on Assets al. (2001 and pses in 401(k) coverage ar 2004). Workers have continuous e not able to replicate having that prior to autom their age, the median replacement rate fr offered 401(k) plans contri atic enrollment, 66 per bute to IRAs, the results cent of elig om their 401(k) ible workers at are m accu ost pro mum lati year-end 2000 were partici ising for lowe ons is about r incom half of pre-retirem e quartiles at pants in ent salary Source: EBRI/ICI 401(k) Accumulation Projection Model. abo 30 ut subscriptions, visit our Web site at www.ebri.org or complete the form below and return it to EBRI. 25 economic security. than an individual’s own benefit in some cases. The PIA calculated for each individual is the sum of three separate age 65 increase across all income groups when individuals not offered 401(k) plans contribute to IRAs, the 401(k) accumulations and r 2001 allowed. Security . Chicago, IL: Ib repla Assum cement rate of onl ing that these participan botson Associates, Inc., 200 eplacement rates at retirement y 16 percent if the cu ts make catch 2. rrent benefit structure is -up cont even if they ributions of the full begin to participate later in their maintained (Figure 3). amount may overstate the On ce non-participating | workers become participants, they continue to be participants and skip this first step at the EBRI Periodicals subscribers also have a password that allows them to e 401(k) mploy 401(k) retirement. Contribut plans, ment at fir plans while i for their entir ms offeri mmediately ion l ng 401(k) im e careers for its for IRAs generally after adding aut plans with au higher incom om tomatic enroll ati all c e enrollment to the m o workers. w sufficient saving for lower inco ment. Autom odel, the participation rate rises atic enrollment takes place me individuals to in the first year of retirement (Figure 1). For the highest income quartile, the projected median replacement • Public education initiatives include EBRI’s Web site (www.ebri.org) and the Choose to percentaN gesam oef portions of th|eir average indexed monthly earnings (AIME). The portions depend on the year in which Figure 5, Default Contribution Rate in P results are most promising for lo lans With Automatic Enrollm wer income quartiles at retiremen ent t. Co .................................................... ntribution limits for IRAs generally 10 careers. Including current next job change. Howevenon-participa r, all workers (p nts produces a rele articipants and non- vant particip mean asure against ts alike) expewhich to analy rience the decision of ze the effects going with effects of catch-up contributions. However, limiting the catch-up contributions to participants already 6 Quartile 1 Quartile 2 Quartile 3 Quartile 4 immediately ® at year-end 2000, which brings many non-participants into 401(k) plans at the beginning of the to 92 rate is about two-thirds of s replicate their 401(k) percent of eligible employ 1 access all online 2 experience. Higher incom | alary ees. The positive im 3 . 4 EBRI Issue Briefs e partic pact of autom 5 ipants find t 6 atic enrollment on participation rates h and/or emselves restricted b 7 Notes 8 ! y the lower IRA 9 the worke Save r reaches retirem Education Program (www ent. For example, for 20 .choosetosave 05 the PIA was .90 org). percent of t thhe first $627 of their AIME plus allow s Baseline (Always in a 401(k)) ufficient saving for lContributions to IRAs When Not in ower income individuals toCatch-Up Contributions and replicate their 401(k) ex Not Always in a 401(k) and No perience. Higher income automOrganiz atic enroation llm ent defaults or making their own contribution rate and asset allocation decisions at each job change. of automatic enrollment. Investment Company Institute. 2005 Investment Company Fact Book, 45 Edition. Washington, DC: Source: EBRI/ICI 401(k) Accumulation Projection Model. Figure 6, Average Participant Before-Tax Contributio 401(k) n Rate, by Contributions to IRAs Selected Participant Age and Contributions to IRAs Salary projection m proved even s contributi All Eligible Workers (Without odel. on l tronger am imits, and thu ong lower inco Automatic Enrollment (3% s do not do as me workers. well as they Automatic Enrollment (3% would if theyAutomatic Enrollment (6% always work for employ Automatic Enrollment (6% ers offering This report builds on 20s the model scenari 30s os presented in Holden and VanDerhei ( 40s 50s Novemb 60s er 2002). It 32 percent of their AIME over $627 and through $3,779 plus 15 percent of their AIME over $3,779 (see the Social participants find themselves restricted by the lower IRA contribution limits, and thus do not do as well as they Unfortunately, at this time, there are no empirical estimates available to incorporate “learning” into the model. It is Number of Jobs Address Investment Company Institute 2005. Automatic Enrollment) Contribution Rate; Money Contribution Rate; Life-Cycle Contribution Rate; Money Contribution Rate; Life-Cycle * In the model, both 401(k) balances at current and previous employers and rollover IRA balances are projected. 20s 30s 40s 50s 60–64 Source: EBRI/ICI 401(k) Accumulation Projection Model. Groups, 1999......................................................................................................................................10 Age Group Security Ad 401(k) plans. ministration’s website, www.ssa.gov, for benefit formulas). presents new wouldscenarios that if they always w exam ork fine the role that 401( or employers offering 40 k) accu 1(k) pl m ans. ulati ons might play in retirement by analyzing 1 Dallas L. Salisbury is president and CE possible that employees may “learn” Market Fund) from their autO of EBRI and omatic enrollm Fund) ent expe EBRI-E rience at a Market Fund) RF. For additional previous job that th Fund) ey do not want Visit EBRI on-line today: www.ebri.org City/State/ZIP Both simulations assume continuous employment and continuous offering of 401(k) plans by employers Age Group Source: EBRI/ICI 401(k) Accumulation Projection Model. 2 information, call EBRI at (202) 659-0670, e-mail info@ebri.org, or visit www.ebri.org The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. 1 Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (see Holden and VanDerhei, October 2001). Source: Fidelity Investments, Mail to: EBRI, 2121 K Street, NW Building Futures, Volume V: How Workplace Savings Are Shaping the Future of Retirement. , Suite 600, Employee B W enefit R ashingto esear n, DC 20 ch Institute 037 or Fax to: (202) 775-6312 Source: EBRI/ICI 401(k) Accumulation Projection Model. Experience from 2001 through age 65 among 401(k) participants with account balances at year-end 2000 and born between 1965 and 1974. Source: EBRI/ICI 401(k) Accumulation Projection Model. 1 2 The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. Percentages do not add to 100 percent because of rounding. *The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. 2121 K Street, NW
Suite 600
Washington, DC
20037 2 All eligible workers includes 401(k) plan participants with account balances at year-end 2000 and eligible nonparticipants. © 2005, Employee Benefit Research Institute -Education and Research Fund. All rights reserved. EBRI Issue Brief No. 283 • July 2005 • © 2005 EBRI • www.ebri.org phone (202) 659-0670
Fax (202) 775-6312 EBRI Notes • December 2003 EBRI Notes • October 2003 15 15 EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org EBRI Issue Brief No. 283 • July 2005 • www.ebri.org www.ebri.org 14 19 22 18 12 21 17 13 11 23 24 10 20 15 16 3 4 6 7 8 5 2 9 No Leave 401(k) Balance in Plan Yes Cash Out, Year-End Balance at Yes Current Employer= 0 Yes Roll Over 401(k) balance to an IRA The premier organization

Volume 283

Pages 28

EBRI Issue Brief

Sarah Holden

Jack VanDerhei

Retirement