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Retirement Savings: Facts, Trends, and Issues

Dallas L. Salisbury President and CEO Employee Benefit Research Institute April 8, 2013 salisbury@ebri.org

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DC 1974 – Pre ERISA, DOL and PBGC – Age 24
39 Years of Retirement Research and Policy Analysis

EBRI Founding 1978 … 9/28/2013 is 35th Anniversary………..Age 64

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Annuity DB to LSD DB to Hybrid LSD DB to LSD DC To Rollover IRA To Roth IRA

Spend More on No Risk One Year Promise 3 + Move Cost and Risk to Employee (inflation, investment, longevity)
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Relative importance of employer costs for employee compensation, March 2012
_____________________________________________________________________________ ______________________ Compensation Civilian Private State and local component workers industry government _____________________________________________________________________________ ______________________ Wages and salaries 69.3% 70.4% 65.2% Benefits 30.7 29.6 34.8 Paid leave 7.0 6.9 7.3 Supplemental pay 2.4 2.9 0.8 Insurance 8.9 8.1 12.0 Health benefits 8.5 7.7 11.6 Retirement and savings 4.6 3.6 8.5 Defined benefit 2.8 1.5 7.7 Defined contribution 1.8 2.1 0.8 Legally required 7.8 8.2 6.1 _____________________________________________________________________________ ______________________ _ ____________ The Employer Costs for Employee Compensation for June 2012 is scheduled to be released on Tuesday, September 11, 2012, at 10:00 a.m. (EDT).

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Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-2011

1% 1% 1% 1%

* Distribution is statistically different from the previous year shown (p<.05). No statistical tests were conducted for years prior to 1999. No statistical tests are conducted between 2005 and 2006 due to the addition of HDHP/SO as a new plan type in 2006. Note: Information was not obtained for POS plans in 1988. A portion of the change in plan type enrollment for 2005 is likely attributable to incorporating more recent Census Bureau estimates of the number of state and local government workers and removing federal workers from the weights. See the Survey Design and Methods section from the 2005 Kaiser/HRET Survey of Employer-Sponsored Health Benefits for additional information.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2011; KPMG Survey of Employer-Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988.

Percentage of Private Sector Workers Participating in an Employment-Based Retirement Plan by Plan Type, 1979-2009*
35% 30%
25% 20% 15% 10% 5% 0% DB only DC only Both

Source: DoL Form 5500 Summaries through 1998. *EBRI estimates 1999-2009

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Turnover With Non-Preservation Affect Results Dramatically

Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039 (percent of final five-year average salary)
Baseline Don't always have a 401(k) 67.2 50.7 27.5 23.2 23.2 54.0 59.5

30.8
24.7

34.7
27.7

39.4

1

2

3

4

Income Quartile at Age 65

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Male Prime-Age (25-64) Workers Median Tenure Trends, By Age, 1951-2010 (High Mobility)
18 Ages 25-34 16 14
Years of Tenure
15.3 14.7 13.0 14.5 14.6 14.5 13.4 11.2 10.5 11.8 11.2 10.1 9.4 6.9 6.7 6.0 4.5 3.5 2.8 2.7 3.2 2.7 3.2 3.1 3.1 3.0 2.8 2.7 2.8 3.0 2.9 2.8 3.2 7.0 6.5 6.1 5.5 5.3 5.0 5.1 5.3 9.5 9.1 10.2 10.2 9.8 9.6 8.1 7.6 7.3 8.2 8.5 9.5 10.1 10.4

Ages 35-44 Ages 45-54 Ages 55-64

12 10 8 6 4 2 0
7.6 9.3 11.4 8.8 11.5 11.0

12.8

5.2

5.2

1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the MonthlyYear Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010) from the U.S. Department of Labor, Bureau of Labor Statistics.

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Female Prime-Age (25-64) Workers Median Tenure Trends, by Age, 1951-2010 (High Mobility)
12 Ages 25-34 Ages 35-44 Ages 45-54 10 Ages 55-64 8.8 7.8 8 9.0 8.5 9.2 9.8 9.7 9.9 10.0 9.6 9.9 9.6 9.2 9.8 9.7

Years of Tenure

6 4.5 4 4.0 3.6 2 3.1 1.8 0 1951 1963 1966 1973 1978 2.0 3.5 1.9 3.6 2.2 1.6 3.6 6.1 5.7 5.9 5.9

6.8 6.3

6.7

7.0

7.2

7.3 6.5 6.4

6.7

7.0

7.1

4.8 4.1 2.8 4.4 2.6 4.5 2.7 2.7 2.5 2.5 2.5 4.5 4.3 4.2 4.5 2.8

4.6

4.7

4.9

2.8

2.6

3.0

1983

1987

1991

1996

1998

2000

2002

2004

2006

2008

2010

Year

Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, and 2010) from the U.S. Department of Labor, Bureau of Labor Statistics.

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Percentage of Those Age 65 or Older With Pension Income, 1975-2010
40% 38% 36% 34% 32% 30.3% 30% 31.5%

37.7%

37.5% 36.4% 35.0% 35.3% 35.5% 34.0% 35.0% 35.0% 35.0%

34.6% 35.9% 35.6%

28%
26% 24% 22% 25.0%

27.3% 27.4%

25.5%

1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010

Source: EBRI tabulations of the 1976-2011 Current Population Survey.
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Percentage of Income Attributable to Pension Income for Those Age 65 or Older, 1975-2010
21% 20.0% 20% 19.0% 19% 18.8% 18% 16.9% 17% 16% 15% 14% 13% 12% 1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010 14.8% 15.8% 17.4% 18.5% 18.2% 18.4% 19.5% 19.8%

19.0%
18.7%

18.4%

14.4%
14.6%

15.3%

15.6%

Source: EBRI tabulations of the 1976-2011 Current Population Survey.
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Provision of Retiree Health Benefits for Current and All Future Retirees, Employers with 500+ Employees, 1993-2001
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001
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Early Retirees

Medicare-Eligible Retirees

46% 40%

43% 40%

41% 35%

40% 33%

38% 31%

36% 30%

35% 28%

31% 24% 29% 23%

Source: Mercer Human Resource Consulting.

Percentage of Workers Expecting Retiree Health Benefits, by Age and Retirement Experience, 1997-2010
50%

45%
45% 40% 36% 35% 30% 25% 20% 23% 32% 27% 43%

1997

2002

2005

2010

33% 33% 28%

27% 22%

21%

15% 15% 11% 10% 5% 0% 45-64, never retired 65+, never retired 45-64, ever retired 65+, ever retired 11% 9%

Source: Employee Benefit Research Institute estimates based on data from the Survey of Income and Program Participation, 1996, 2001, 2004, and 2008 panels.

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Retirement Income Sources of the Future

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Approximations Of Relative Benefits From DB and DC Plans Suggest That Both Can Be Valuable Additions To Social Security – Automatic Enrollment Is Of Major Value – For The Lowest Income Workers To Do Well With DC Requires Automatic Enrollment

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Employees Currently Ages 25–29: Median Replacement Rates from Voluntary Enrollment 401(k) vs. Stylized Final Average Defined Benefit Plan (1.5%, High Three) as a Function of Salary Quartile and Number of Years Eligible
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% DC, Lowest DB, Lowest DC, Highest DB, Highest 1–10 0% 2% 2% 3% 11–20 0% 11% 18% 14% 21–30 2% 28% 30% 28% 31–40 9% 41% 47% 41%

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4. Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).

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Employees Currently Ages 25–29: Median Replacement Rates from Automatic Enrollment 401(k) vs. Stylized Final Average Defined Benefit Plan (1.5%, High Three) as a Function of Salary Quartile and Number of Years Eligible
80% 70% 60% 50% 40% 30% 20% 10% 0% DC, Lowest DB, Lowest DC, Highest DB, Highest

1–10 0% 2% 4% 3%

11–20 17% 11% 22% 14%

21–30 34% 28% 41% 28%

31–40 60% 41% 67% 41%

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205a4 and 120105a4 Returns are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal).

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Employees Currently Ages 25–29: Median Replacement Rates from Automatic Enrollment 401(k) vs. Stylized Final Average Defined Benefit Plan (1.5%, High Three) as a Function of Salary Quartile and Number of Years Eligible: Alternative (Lower) Return Scenario
45% 40% 35% 30% 25% 20%

15%
10% 5% 0% DC, Lowest DB, Lowest DC, Highest DB, Highest 1–10 0% 2% 2% 3% 11–20 10% 11% 14% 14% 21–30 22% 28% 25% 28% 31–40 36% 41% 38% 41%

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205a4 and 120105a4alt. Returns are based on a stochastic process with means of 4.45% Equity and 3.8% Fixed Income (nominal).

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Employees Currently Ages 25–29: Median Replacement Rates from Voluntary Enrollment 401(k) vs Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Function of Salary Quartile and Number of Years Eligible
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% DC, Lowest DB, Lowest DC, Highest DB, Highest 1–10 0% 3% 2% 3% 11–20 0% 9% 18% 9% 21–30 2% 14% 30% 15% 31–40 9% 23% 47% 24%

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4cb. Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are based on a stochastic process with a mean of 6.3% (nominal).

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Employees Currently Ages 25–29: Median Replacement Rates from Automatic Enrollment 401(k) vs Stylized Cash Balance Defined Benefit Plan (4.5% Pay Credit) as a Function of Salary Quartile and Number of Years Eligible
80% 70% 60% 50% 40% 30% 20% 10% 0% DC, Lowest DB, Lowest DC, Highest DB, Highest

1–10 0% 3% 4% 3%

11–20 17% 9% 22% 9%

21–30 34% 14% 41% 15%

31–40 60% 23% 67% 24%

Source: Source: EBRI/ERF Retirement Security Projection Model,® versions 100205b4 and 120105b4. Returns for 401(k) are based on a stochastic process with means of 8.9% Equity and 6.3% Fixed Income (nominal). Returns for cash balance are

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Attitudes Are Getting More Realistic

Far More Savings Has Been – And Is - Needed

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EBRI Retirement Readiness RatingTM (RRR): 2003 vs. 2012 (Status Quo for Social Security, Housing Equity Used "As Needed") Percentage of population at risk* for inadequate retirement income, by age cohort (baseline assumptions)
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% EBRI 2003 RRR EBRI 2012 RRR Early Boomers 51.7% 44.3% Late Boomers 48.5% 43.3% Gen Xers 51.7% 43.9%

Sources: EBRI Retirement Security Projection Model® versions 1501 and 1502. * See text for definition of "at risk"

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EBRI Retirement Readiness RatingTM (RRR): 2012 (Status Quo for Social Security, Housing Equity Used "As Needed") Percentage of population at risk* for inadequate retirement income, by age cohort and income quartile (baseline assumptions)
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Lowest income quartile 2 3 Highest income quartile Early Boomers 86.8% 48.0% 29.3% 12.5% Late Boomers 83.6% 46.9% 26.5% 11.2% Gen Xers 77.7% 45.8% 29.3% 16.7%

Sources: EBRI Retirement Security Projection Model® versions 1501 and 1502. * See text for definition of "at risk"

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Impact of future years of 401(k) eligibility on 2012 at‐risk* ratings for Gen Xers
70.0% 60.7% 60.0%

50.0% 41.1% 40.0% 30.6% 30.0%

20.0%

18.2%

10.0%

0.0% 0 1-9 10-19 Future years of 401(k) eligibility 20+

*An individual is considered to be at‐risk in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump ‐sum distribution scenario is chosen), and net housing equity ( in the form of a lump ‐sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard‐of‐living and other thresholds. Source: EBRI Retirement Security Projection Model,® Version 120201.

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It Is Important To Look At Both DC and IRA Balances

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Composition of combined 401(k) and IRA balances by age. Analysis limited to individuals with both 401(k) and IRA balances at the end of 2008
100% 90% 80% 70% 60% non-rollover IRA 50% 40% 30% rollover 401(k)

20%
10% 0%

111209c
25-34 35-44 45-54 55-64 65-74

Source: EBRI DC/IRA Database

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It Is Important To Look At Both DC and IRA Balances When Considering Retirement Income Adequacy – This has led to a rush of products to provide comprehensive planning using all assets and liabilities, the addition to managed accounts of lifetime income payout approaches, and the use of financial planners.

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Longevity “Risk” “Reward”
The most significant risk that retirees face is longevity risk – the risk of outliving their assets. This risk is not hedged by traditional investment strategies. Probability of a Healthy 65-year-old Living to Various Ages 100% Male Female At least one spouse 50% chance 50%
85 88 92

75% Probability

25% chance 25%
92 94 97

0 65

70

75

80

85 Age

90

95

100

105

Source: Annuity 2000 Mortality Tables.

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Income Distribution of those age 65 and older in 2010 - $ to achieve 100% income replacement with annuity purchase versus alternative income streams at noted deterministic rate of return with 95% probability of success.
Percentile

10% 25% 50% 75% 90% 95%

Income $6,159 $10,757 $18,000 $33,600 $61,357 $89,102

SS % 80% 92% 84% 57% 30% 19%

Not SS $1,231 $860 $2,880 $14,448 $42,949 $72,172

IMA.com $ 18K 12.5K 42K 210K 624K 1.05M

3%RR 27K 19K 63K 325K 965K 1.6M

7%WRR 17K 12K 40K 199K 590K 1M

14.4 % had income of $50,000 or more. IMA.com quotes on 9/13/2011 for female age 65 in GA – not inflation indexed – no guaranteed period – no survivor benefit
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PAYABLE
70 60 50 40 30

Monthly Benefit Levels as Percent of Career-

Average Earnings by Year of Retirement at age

62

Low Earner ($19,388 in 2010; 25th percentile)

Medium Earner ($43,084 in 2010; 56th percentile)

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Max Earner ($106,800 in 2010; 100th percentile)

High Earner ($68,934 in 2010; 81st percentile)

10 Source: 2010 OASDI Trustees Report 0 1960 1980 2000 2020 2040 2060 2080
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Average Percentage Reductions in 401(k) Account Balances at Social Security NRA by Imposing 20/20 Limits in 2012, by Age and Age-specific Salary Quartiles
16% 14% 12% 10% 8%

9.8%

15.1%

Salary
Lowest 2 3 Highest

6%
4% 2% 0% 26-35 36-45 Age
Source: EBRI Retirement Security Projection Model Version 110627c1. NB: this simulation only models the financial impact of the expected reduction in 401(k) contributions for employees who are not automatically enrolled by imposing the new limits and does not attempt to assess behavioral modifications on the part of either the plan sponsor nor the employees assumed to be eligible for participation in the plan. The simulated rates of return are the same as in VanDerhei and Copeland (July 2010). This version of the analysis assumes no job turnover, withdrawals or loan defaults. The full stochastic nature of the model will be included in future analysis.

46-55

56-65

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Issues of the Day: Public Social Security: Is 78% Enough?
(Current Sustainable Benefit With No Reform)

Employer DC and Individual Retirement Savings: “Leakage”

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Workers Having Saved Money for Retirement, by Household Income

2009

2013

93% 80% 76%

94%

49%

24%

Workers with Household Income <$35,000

Workers with Household Income $35,000-$74,999

Workers with Household Income $75,000+
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Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2009-2013 Retirement Confidence Surv
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Ability to Come up With $2,000 if an Unexpected Need Arose Within the Next Month

Workers

Retirees

Definitely could

50% 52% 20% 17% 12% 6% 16% 22% 1% 4%

Probably could

Probably could not

Definitely could not

Don't know / Refused

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2013 Retirement Confidence Survey.
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Americans Reporting They Dipped into Savings to Pay for Basic Expenses
34%

31%
33% 34%

25% 22%

Workers

Retirees

2011

2012

2013

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 19942013 Retirement Confidence Surveys.

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Issue of the Day: Coverage and Participation

Voluntary vs. Mandatory vs. Employee Opt Out
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Issue of the Day: Life Time Income or ?

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Issue of the Day: How Much Do I Really Have to Save?

Constant Confusion of % Needed for 40 Years Versus My Age Specific Percentage

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Total Savings and Investment Reported by Workers, Among Those Providing a Response (not including value of primary residence or defined benefit plans)
2003 Less than $1,000 2008 2009 20% 2010 27% 16 11 2011 29% 17 10 2012 30% 18 12 2013 28% 18 11

36%
$1,000 - $9,999 $10,000 - $24,999 55% 13 19 13

$25,000 - $49,999
$50,000 - $99,999 $100,000 $249,999

15
11 11

12
12 15

11
12 12

12
11 11

11
9 14

10
10 11

9
10 12

$250,000 or more

7

12

12

11

10

10

12

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 20032013 Retirement Confidence Surveys.

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Total Savings and Investment Reported by Retirees, Among Those Providing a Response (not including value of primary residence or defined benefit plans)
2003 Less than $1,000 51% $1,000 - $9,999 54% 17 15 14 19 16 2008 2009 23% 2010 27% 2011 28% 2012 28% 2013 31%

$10,000 - $24,999
$25,000 - $49,999 $50,000 - $99,999 $100,000 $249,999 9 11 13

9
9 6 13

16
13 9 10

14
11 6 15

12
6 11 12

8
9 8 12

8
9 9 10

$250,000 or more

12

12

12

12

17

15

17

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2003-2013 Retirement Confidence Surveys.

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