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Discussion of: How Automatic Enrollment Affects the Likelihood and Distribution of 401(k) Contributions:

Evidence from a National Survey

Retirement Research ConsortiumAugust 7, 2014

Jack VanDerheiEBRI Research Director

vanderhei@ebri.org

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Overview

• What are you missing with a sample aged 55+?• Impact of automatic enrollment (AE) on participation rates by age

• What are you missing if you treat all AE plans the same?• Default contribution rates• Auto escalation

• What happens when you combine the increase in participation rates under AE with the new behavior in employee contributions?

• Percentage of workers eligible for AE with a larger simulated employee contribution under Voluntary Enrollment (VE), by tenure

• What does it mean in the long run?• Percentage of Successful Simulated Retirements by Income Quartile: VE

vs. AE 401(k) Plans

• Some potential data/methodological considerations • Time permitting

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Impact of plan design on participation rates by age

<25 25-34 34-44 45-54 55-64 65+0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

VEAE

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Source: Stephen P. Utkus and Jean A. Young. “How America Saves 2014, A Report On Vanguard 2013 Defined Contribution Plan Data.”

Sample limited to ages 55 to 69

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Importance of AE plan design variables for employee contributions: Ratio of median contributions for plans with 6 percent default and auto-

escalation vs. those with 3 percent default and no auto-escalation

By age

26-35 36-45 46-55 56-65 1.04

1.05

1.06

1.07

1.08

1.09

1.10

1.11

1.12

By age-specific salary quartiles

lowest second third highest 1

1.1

1.2

1.3

1.4

1.5

1.6

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Conditional upon participation Limited to employees with 4 or less years of tenure and at least $10k in salaryFilters out plans that implemented AE between 1/2/2008 and 12/31/2011

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Percentage of workers eligible for AE with a larger simulated employee contribution under VE, by tenure

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 400%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Tenure

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Source: Author’s simulations for WSJ, May 2011

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Percentage of Simulated Successful* Retirements by Income Quartile: Voluntary Enrollment vs. Automatic

Enrollment 401(k) Plans

Lowest income quartile Highest income quartile50%

75%

100%

67%

59%

85%

73%

VE AE

Source: VanDerhei (January 2014)* "Success" is defined as achieving an X percent real replacement rate from Social Security and 401(k) accumulations combined as defined in VanDerhei and Lucas (2010) where X = 80. The population simulated consists of workers currently ages 25–29 who will have more than 30 years of simulated eligi-bility for participation in a 401(k) plan. Workers are assumed to retire at age 65 and all 401(k) balances are converted into a real annuity at an annuity purchase price of 18.62.

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Plans are assumed to have automatic escalation with a 1 percent of annual compensation increase and plan-specific default contribution rates. Employees are assumed to retain their previous level of contributions when they participate in a new plan and opt-out of automatic escalation in accordance with the probabilities in VanDerhei (September 2007)

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Potential data/methodological considerations

• Only applies to those 55+• 2008 and 2010 data does not allow one to observe the importance of

auto-escalation (primarily post-PPA)• Definition of AE used in the study

• Is it possible that this is picking up employees who started prior to the plan’s AE implementation date?

• Several industry surveys have continued to show that AE provisions are typically NOT applied retroactively

• The disparity between AE participation rates (relative to VE) for this study and those in industry and academic studies may suggest that respondents are answering the AE question in the affirmative when they shouldn’t

• Is the “automatic enrollment” feature of DB a potential confusion here?

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References

Utkus, Stephen P. and Jean A. Young. “How America Saves 2014, A Report On Vanguard 2013 Defined Contribution Plan Data.”

VanDerhei, Jack (January  2014), The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,  EBRI Notes

VanDerhei, Jack (October 2011), What Do You Call A Glass That Is 60–85% Full? Pension Section News, Society of Actuaries.

VanDerhei, Jack (September 2007).  The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income EBRI Notes.

VanDerhei, Jack and Lori Lucas (November 2010), The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy, EBRI Issue Brief

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