EBRI Notes

'Target-Date Fund Use Over Time' and 'The Early Retiree Reinsurance Program: $5 Billion Will Last About Two Years'

Jul 15, 2010 16  pages


This issue of EBRI Notes contains two articles: "Target-Date Fund Use Over Time," and "The Early Retiree Reinsurance Program: $5 Billion Will Last About Two Years"

Target-Date Fund Use Over Time

IMPORTANCE OF TDFs: The use of target-date funds (TDFs) in 401(k) plans has grown rapidly in recent years: The percentage of all 401(k) plan participants using them increased from 25 percent in 2007 to 31 percent in 2008. Use of these funds has been more likely among participants who are young, have lower account balances and shorter tenure at their current job, as new workers are the most likely to be auto-enrolled in their employer’s 401(k) plan. Because TDFs are still relatively new for most participants, little is known how participants use these funds over time.

PARTICIPANTS STICKING WITH TDFs: Data from the EBRI/ICI 401(k) database for 2007–2008 show that 401(k) plan participants who use TDFs have a very high likelihood (94 percent) of remaining in these funds the following year. Future growth can be expected in TDFs as the participants in target-date funds remain in them, and as new participants sign up for them voluntarily or through a default option. Therefore, the design of TDFs (especially the investment allocation “glide path”), as well as participants’ understanding of these funds, will become more critical to the future success of 401(k) plans.

The Early Retiree Reinsurance Program: $5 Billion Will Last About Two Years

PPACA’S EARLY RETIREE REINSURANCE PROGRAM: The Patient Protection and Affordable Care Act (PPACA) of 2010 created a temporary reinsurance program for sponsors of employment-based health plans that provide retiree health benefits to retirees who are over age 55 and not yet eligible for the Medicare program. The program provides an 80 percent subsidy for retiree claims of between $15,000 and $90,000. Congress appropriated $5 billion for the program, which is effective June 1, 2010, and the subsidy will be available through the earlier of Jan. 1, 2014, or the date when the funds are exhausted.

EMPLOYER INCENTIVE: One goal of the program is to provide an incentive for employers to maintain retiree health benefits and assist retirees with their costs for health coverage. Under the early retiree reinsurance program, plan sponsors must be able to show that the subsidies were not used to reduce their level of support for the plan. Subsidies can be used to reduce retiree costs, and sponsors must also show that the subsidies were used to generate savings or had the potential to generate savings.

EXHAUSTION LIKELY WITHIN TWO YEARS: An important question is whether the $5 billion will be exhausted before 2014. This article finds that if the subsidy were drawn down for all early retirees and their dependents, $2.5 billion of the $5 billion available would be exhausted in the first year of the program. The $5 billion would last no more than two years and would not be available in 2012 or 2013.