Summary
A new research report published today by the Employee Benefit Research Institute (EBRI), J.P. Morgan Asset Management and National Association of Government Defined Contribution Administrators (NAGDCA) reviewing public-sector defined contribution (DC) accountholder data from the Public Retirement Research Lab (PRRL) Database found that participants who experienced unfunded spending “spikes” were more likely to have increased credit card debt and to have taken a DC plan loan. Furthermore, those with a higher percentage of their available credit card debt being used had lower contributions and lower account balances, on average.
Spending spikes are determined to occur when a household’s monthly spending is at least 25% or more than the previous 12 months’ median monthly spending and this spending cannot be covered by the household’s income and cash reserves (checking and savings accounts). Nearly one-third (29%) of the public sector DC plan participants were found to have these spikes in the study year, and they were not among just those with lower incomes as nearly one-quarter of those with incomes of $100,000 or more experienced a spike. These spending spikes have a clear impact on the likelihood of DC plan participants taking a plan loan and increasing their credit card debt in the year of the spike. Of those with a spending spike in the analysis year, 7% took a new plan loan and 31.7% increased their credit card debt, compared with 2.7% and 25.9, respectively, of those without a spending spike in the same year.
Other key findings in the new report, “How Financial Factors Outside of a Defined Contribution Plan Can Impact Retirement Readiness: An Examination of Public-Sector Participants,” include:
• On a dollar basis, among those with incomes of $150,000 or less who had a spike, 60% of these household observations had spikes larger than $2,500 aggregated over the year and 82% had spending not covered by income alone above this threshold.
• The likelihood of experiencing a spike increased with the spending ratio and beginning of the year credit card utilization. In contrast, the likelihood of a spike decreased as gross income increased. However, nearly one-quarter of the households with incomes of $100,000 or more had a spike.
• Households are more likely to take on additional credit card debt before taking the plan loan, as approximately one-third to one half of those with credit card utilization of less than 80% increased credit card debt, while less than 8% took a new plan loan with that level of credit card utilization. However, when credit card utilization reaches 80%, the likelihood of increasing credit card debt decreases to 22.4%, while the percentage taking a new plan loan increases to 11.5%.
“It is clear that spending, debt and saving for retirement are explicitly linked. This study builds on the prior J.P. Morgan/EBRI study that looked at the links between these actions among private sector DC plan participants to determine if the same links are found among public sector DC plan participants and found that the same relationships exist among these workers as well. These links between spending and debt suggests that retirement planning is not wholly different by place of employment, even where benefits availability may be dissimilar, but part of a broader holistic financial planning journey where all factors need to be incorporated. In fact, participating in a budget webinar has been found to be associated with higher DC plan contributions. Programs to help with workers’ overall finances could be indispensable. The decision to a take a plan loan is not just dependent on what happens in the plan but on the total financial profile of the participant,” said Craig Copeland, director, Wealth Benefits Research, EBRI.
The data analyzed for this research study came from the PRRL Database and JPMorgan Chase Bank, N.A. The PRRL Database is an opt-in collaboration among public retirement plan sponsors, EBRI and NAGDCA. The database includes information from two hundred and sixty-seven 457(b), 401(a), 401(k) and 403(b) defined contribution plans, representing 2.5 million state, county, city and subdivision government employees and incorporating over 3 million retirement accounts that is valued at $170 billion in assets (as of year-end 2021). The Chase data sample is restricted to the households in 2019–2021 who use Chase as their primary banking institution, and their total household spending through all payment mechanisms.
“Given the impact of participants’ overall finances, it is clear that prohibiting plan loans would not necessarily improve participants’ retirement security. Without the option, participants would seek loans outside the plan to fill spending gaps, and those loans may have terms more expensive than those available as part of the plan,” said Sharon Carson, executive director and retirement strategist, J.P. Morgan Asset Management. “The research found that, like private sector DC plan participants, public sector DC plan participants who lack income and cash reserves to support a spending spike are likely to end up with more credit card debt. This higher debt can have a long-lasting impact on retirement security, since higher credit card utilization is correlated with lower DC plan contributions and account balances, even when controlling for income. As a result, the availability of emergency savings to cover spending spikes can be a critical factor in preventing or stalling a cycle of increasing debt that can significantly impact retirement readiness, wherever the individual works.”