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Center for Research on Retirement Readiness
This program examines issues that are of relevance to the retirement income security of American workers.
The primary focus of this program is the EBRI-ERF Retirement Security Projection Model.® It is based on results from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project as well as a time series of several hundred plan descriptions used to provide a sample of the various defined benefit and defined contribution plan provisions applicable to plan participants. In addition, several public surveys based on participants’ self-reported answers (SCF, CPS, and SIPP) were used to model participation, wages, and initial account balance information.
The model currently estimates the balance of any defined contribution plan and/or IRA (whether through regular contributions or rollovers) of the individual at Social Security normal retirement age. In addition, it estimates the accrued benefits earned and assumed to be retained by defined benefit plan participants.
This model proved to be extremely valuable during February 2002, as we were asked on two separate occasions to perform virtually instantaneous analysis of different “what-if” scenarios concerning company stock. In the first situation, the House Education and Workforce Subcommittee on Employer-Employee Relations requested that we model the expected results of removing company stock from 401(k) investment portfolios. Prior to that time, several testimonies had focused on the additional volatility associated with company stock, but none had focused on the differential asset allocation resulting from nonparticipant-directed contributions and its impact on expected rates of return. We were able to demonstrate that, while indeed the retention of company stock increases volatility (vis-à-vis a situation in which it would be removed), average 401(k) balances would be expected to be 4.0−7.8 per-cent larger, on average, if it were retained.
In the second situation, we were asked to comment on a proposal that would in essence either mandate a minimum guaranteed rate of return for 401(k) plans and/or expand PBGC coverage to these plans. We were able to use the model to estimate the impact within a day and present the results at the House Ways and Means hearing.
In the summer of 2003, we were asked to provide congressional testimony with respect to the relative advantages of defined benefit plans. Again, we were able to provide virtually instant turnaround and use the model to predict the impact of mandatory group annuitization on the decline in retirees’ accumulation of deficits (vis-à-vis the status quo of allowing retirees to spend down their distributions as they desire). In January 2004, we were asked to use the newest results from the model to testify before the U.S. Senate Special Committee on Aging hearing: “Retirement Planning: Do We Have A Crisis In America?” The results were also picked up in the New York Times April 13 special supplement on retirement.
The May 2004 Issue Brief launched the first set of national results from the EBRI-ERF Retirement Security Projection Model® to model the impact of various policy scenarios with respect to defined benefit promises. The results from this model served as the focus of the discussion of the May 6 policy forum, “ERISA at 30: The Decline of Private-Sector Defined Benefit Promises and Annuity Payments: What Will It Mean?”
In March 2005, the model was used to present preliminary results of the impact of purchasing long-term care insurance at a session at the 2005 Joint Conference of the American Society on Aging and the National Council on the Aging.
In the March 2006 Issue Brief, we used this model to analyze the impact on employees of freezing a defined benefit plan. It was published within days of GM’s announcement of its intention to freeze its defined benefit plan. The timeliness of the Issue Brief resulted in significant press coverage, including articles in the Washington Post and CNN as well as a previous article in the New York Times.
The September 2006 Issue Brief highlighted initial results of Ballpark E$timate® Monte Carlo—a free online tool that we plan to release as a companion to the existing interactive version of Ballpark E$timate.® One of the problems with many of the planning models for the accumulation period (including the current version of Ballpark E$timate®) is that the user is asked for a replacement rate. While this no doubt serves as a useful threshold for some situations, the ability of a replacement rate to allow an individual to determine whether there will be sufficient resources to provide “adequate” retirement income at least a certain percentage of the time is becoming increasingly problematic as investment risk, longevity risk, and the financial consequences of potentially catastrophic health care episodes continue to be shifted to individuals. This Issue Brief illustrates the problematic nature of using conventional replacement rates for retirement planning through a “building block” approach that walks the reader through the development of the model one step at a time. It shows in certain stylized situations how much would be needed in terms of a replacement rate to have adequate retirement income 50, 75, and 90 percent of the time. The results suggest that, in reality, there is no “correct” single replacement rate. Even at a specified probability of success, an “adequate” replacement rate depends dramatically on the level of retirement expenditures, retirement age, gender, asset allocation, percentage of annuitization, and other variables detailed in this Issue Brief.
EBRI-ERF Retirement Security Projection Model®
The Retirement Security Projection Model® was used to model the expected retirement income derived from Social Security and retirement plans for residents of the state of Oregon. The analysis was conducted for birth cohorts from 1936−1965, and results were broken out by gender and family status. The projected income was compared with expected housing costs plus one of three measures of health-related expenditures to perform a simplified version of retirement income adequacy. The percentages of family units having insufficient “retirement income” to meet these retiree expenditures were simulated, and the aggregate shortfall in the first year of retirement was calculated.
We presented the results of the Oregon project at three Retirement Study Group meetings in November 2001, and appeared to generate interest on the part of several states both to participate and to provide state-specific data to allow us to make better estimates of retiree health-related expenditures (such as long-term care). We were able to secure more extensive data on retiree expenditures from the state of Kansas, and used them to develop a hybrid model for analyzing retiree expenditures: stochastic for some expenditures (e.g., home health care and nursing facilities) and deterministic for others (e.g., housing and food). We finished the Kansas project in July 2002 and completed a similar project with the state of Massachusetts in December 2002. These state-specific results were used as a foundation for the December 2002 policy forum.
We expanded the retirement income assessment model from a state-specific analysis to one of national scope. We published the preliminary results of this model as a November 2003 Issue Brief and used it as a centerpiece for the December policy forum.
In 2004, we modified the model to allow us to run sensitivity analyses on the following:
- Benefit accrual freezes for defined benefit plans.
- Modification to cash balance plans (both increases in conversions of traditional final average plans and elimination of existing plans).
- Lump-sum distributions (assuming that they are offered to all defined benefit plan participants at retirement and that they are always chosen).
- Payment of all accumulations as life annuities from all qualified plans and IRAs.
The results were written up as part of the May 2004 Issue Brief and presented at the May 2004 policy forum. In March 2005, the model was used to present preliminary results of the impact of purchasing long-term care insurance at a session at the 2005 Joint Conference of the American Society on Aging and the National Council on the Aging.
In 2006, we modified the program to allow for the type of pension freeze computations mentioned above. RSPM was significantly enhanced for the May 2008 EBRI policy forum by allowing automatic enrollment of 401(k) participants with the potential for automatic escalation of contributions to be included. Additional modifications were added in 2009 for a Pension Research Council presentation that involved a winners/losers analysis of defined benefit freezes and the enhanced defined contribution employer contributions provided as a quid pro quo. A new subroutine was added to the model to allow simulations of various styles of target-date funds for a comparison with participant-directed investments in 2009. Most recently, the model was completely reparameterized with 401(k) plan design parameters for sponsors that have adopted automatic enrollment provisions and the results published in the April 2010 EBRI Issue Brief.
The EBRI Retirement Readiness Rating,™ as well as other results in the July 2010 Issue Brief, are based on an updated version of RSPM. The model has been completely revamped since the original 2003 model to account for the trends toward automatic enrollment in 401(k) plans, automatic escalation of contributions, and the increased utilization of target-date funds (TDFs) whether through qualified default investment accounts (QDIAs) or through participant directed investments.
A list of recent papers related to the Center for Research on Retirement Readiness can be found below.
EBRI Issue Briefs
- “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2008,” November 2009.
- “Individual Account Retirement Plans: An Analysis of the 2007 Survey of Consumer Finances, With Market Adjustments to June 2009,” August 2009.
- “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2007,” October 2008.
- “EBRI 2008 Recent Retirees Survey: Report of Findings,” July 2008.
- “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2006,” November 2007.
- “Retirement Income Adequacy After PPA and FAS 158: Part One—Plan Sponsors’ Reactions,” July 2007.
- “How Are New Retirees Doing Financially in Retirement?” February 2007.
- “The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects,” July 2010.
- “Retirement Plan Participation and Asset Allocation, 2007,” November 2009.
- “Debt of the Elderly and Near Elderly, 1992–2007,” October 2009.
- “Retirement Plan Participation: Survey of Income and Program Participation (SIPP) Data, 2006,” February 2009.
- “Lump-Sum Distributions at Job Change,” January 2009.
- “Retirement Annuity and Employment-Based Pension Income, Among Individuals Age 50 and Over: 2006,” January 2008.
- “Income of the Elderly Population Age 65 and Over, 2006,” December 2007.
- “Experts Track Continuing Evolution of U.S. Pension System,” July 2007.
- “Pension Income of the Elderly and Characteristics of Their Former Employers; and Retirement Annuity and Employment-Based Pension Income Among Individuals Age 50 and Over: 2005,” March 2007.
- “Retirement Plan Participation and Asset Allocation, 2004,” February 2007.
- VanDerhei, J., Copeland, C., Salisbury, D. (2006). Retirement Security in the United States: Current Sources, Future Prospects, and Likely Outcomes of Current Trends (pp. 175). Employee Benefit Research Institute–Education and Research Fund, Washington, DC.
- VanDerhei, J., Copeland, C. (forthcoming). The Declining Role of Private Defined Benefit Pension Plans: Who is Affected, and How. Oxford University Press:.
- VanDerhei, J., Copeland, C. (2008). In Robert B. Hudson (Ed.), Private Pensions and the Boomers: How Much is Enough? in Boomer Bust? Economic And Political Dynamics Of The Graying Society. Praeger.
- Falling Stocks: What Will Happen to Retirees' Incomes? The Worker Perspective, “The Economic Crisis of 2008: What Will Happen to Retirees’ Incomes?” Thirty-First Annual APPAM Research Conference, November 6, 2009.
- What Will Happen to Retirement Income for 401(k) Participants After the Market Decline? ISCEBS Annual Symposium, August 2009.
- Decline in defined benefit plans – impact on future retirement income and modifications in defined contribution plans to improve retirement income security, Presentation for the President's Economic Recovery Advisory Board Retirement and Savings Working Group, May 20, 2009.
- The Role of Private Defined Benefit Pension Plans in US Retirement Income: Past, Present and Future Scenarios, Spring 2009 Pension Research Council Conference: Restructuring Retirement Risk Management in a Defined Contribution World, Wharton School, University of Pennsylvania, May 2009.
- Economic Shift: Diagnosing A Volatile Economy’s Impact On Recent Retirees’ Decision, And Monitoring The Future of Baby Boomer Retirement Income, Managing Retirement Income Conference, February 10, 2009.
- “What is Left of our Retirement Assets?” Urban Institute conference, February 3, 2009.
- 401(k) Valuations Published: September 1, 2015 401(k) Balances and Changes Due to Market Volatility
- Data Book Last Updated: July 2014 A comprehensive collection of the most up-to-date benefit information available