Defined Contribution Retirement Plans Research Articles

Plan Design and Participant Behavior in Defined Contribution Retirement Plans: Past, Present, and Future

Plan Design and Participant Behavior in Defined Contribution Retirement Plans: Past, Present, and Future

Plan Design and Participant Behavior in Defined Contribution Retirement Plans: Past, Present, and Future

Plan Design and Participant Behavior in Defined Contribution Retirement Plans: Past, Present, and Future

The rise of market‐based “choice” programs: 100 years of social sorting in social welfare services

AbstractSocial service programs in the United States increasingly focus on giving individuals and families more “choices.” The approach is exemplified by “choice programs,” where people receive services through various forms of market participation. Examples of choice programs include defined contribution retirement plans, housing vouchers, charter schools, and health insurance marketplaces. Individuals across the socioeconomic spectrum have become accustomed to choice programs, and one's social status greatly affects the types, qualities, and prices of services people receive. The importance of the conversation around choice programs for providing access to resources is immense. Yet, despite contentious debate about their utility, we lack a comprehensive understanding of the institutionalization and widespread adoption of choice programs across a diverse range of social service domains. This article synthesizes stratification literature on retirement, healthcare, education, and housing to document the historical rise of choice programs. Particular attention is given to explaining how behavioral patterns and routines become second nature, altering who benefits, who is left out, and the overall effectiveness of the social welfare system.

Is older age more unequal than we think? Estimates from the Survey of Income and Program Participation linked to administrative records

Despite increased scholarly and policy interest in income inequality, our knowledge of inequality in later life is relatively limited. One challenge to studying inequality in older age groups is that income sources that are important in later life, including pensions and retirement accounts, may be poorly captured by household income surveys. In this study, we investigate income inequality among the older population in the United States, focusing on how measurement error affects retirement income estimates and its impact on summary measures of inequality. We use a rich dataset that links respondents in the Survey of Income and Program Participation with restricted-use administrative records from the Social Security Administration and Internal Revenue Service. We find systematic, nonclassical measurement error in survey-reported retirement income, particularly from pensions and retirement accounts. Due to these patterns of measurement error, income inequality estimates are considerably higher using administrative records instead of survey-reported data. Additional analyses show the effects of measurement error when estimating between- and within-group inequality across racial-ethnic and education groups. The downward bias associated with measuring income inequality among older Americans could worsen in the future given the shift from defined-benefit to defined-contribution retirement plans.

CARING FOR CHILDREN WITH DISABILITIES, WORKING, AND SAVING FOR RETIREMENT OVER THE LIFE COURSE

Abstract In the US, financial security in retirement depends on having savings and other assets accumulated during the pre-retirement years. Pension savings accrue over the working life, in defined-benefit or defined-contribution retirement plans. Mothers with children with disabilities experience different life-course work trajectories than mothers without children with disabilities, though data used in previous studies primarily examine a single point in time or a short span of years. This paper draws longitudinal data from the nationally-representative 1979 National Longitudinal Survey of Youth for the years 1987 through 2018, using a life-course perspective and sequence analysis to identify long-term work patterns among women with children who do and do not have disabilities with an explicit focus on variations in occupational class and employment status. We found a distinctive pattern of long-term work history with five types: Full-time semi-professional to not working, Constantly not working, Semi-professional full time, Professional full time, and Not working to full time work. Results from regression analyses revealed variation in mothers’ household financial preparation for retirement at late mid-adulthood. Compared with mothers who held professional full-time jobs throughout their adulthood, mothers who started full time jobs in middle age and have children with disabilities were less likely to have pension plans. Mothers of children with disabilities who left the labor force in early middle age tended to have lower retirement savings. Policy interventions to address these mothers’ caregiving ability to stay engaged in the workforce and prepare for their retirement need to be explored.

Required Minimum Distribution Spreadsheet Calculators Based on the SECURE Act of 2019

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made significant changes to the required minimum distribution (RMD) schedule for individual retirement accounts and defined contribution retirement plans. Microsoft Excel spreadsheet calculators are developed to calculate annual RMD cash flows throughout retirement for those who are retired and for those who are planning to retire. Unlike internet calculators, the spreadsheet calculators allow savings to earn monthly interest throughout retirement. Further, the calculators are easy to use and allow individuals to forecast long horizon RMD distributions for subsequent tax or reinvestment planning purposes.

How Do Faculty Select between Defined Benefit and Defined Contribution Retirement Plans? A Qualitative Investigation

How Do Faculty Select between Defined Benefit and Defined Contribution Retirement Plans? A Qualitative Investigation

How FGTS Would Become an Efficient Defined Contribution Retirement Plan Investing in SeLFIES. A Solution Focused on Future Real Income

How FGTS Would Become an Efficient Defined Contribution Retirement Plan Investing in SeLFIES. A Solution Focused on Future Real Income

The Impact of Tax Incentive Structure on Taxpayers' Retirement Savings Decisions

ABSTRACTWe investigate whether and how the structure of retirement savings incentives influences their relative attractiveness to taxpayers, independent of their effect on after-tax returns. To that end, we examine taxpayers' preferences between defined contribution retirement plans with back-loaded (i.e., Roth) and front-loaded (i.e., traditional) tax incentives. In three experiments, we find limited evidence that individuals appropriately weight temporal tax rate changes, the primary factor differentiating after-tax returns across incentive structures, in their plan preferences. In contrast, we find consistent evidence that the incentive structure's relation to taxpayers' broader attitudes and preferences significantly impacts plan preferences. Overall, we find evidence that generally held attitudes and preferences lead to a systematic preference for back-loaded retirement plans, even in situations in which taxpayers know that a back-loaded plan is economically dominated by a front-loaded plan. The results have implications for policymakers and others considering how best to encourage retirement savings.JEL Classifications: D14; H31; K34.

Financial Well-Being Across Age Cohorts and Its Impact on Retirement Security

The lack of retirement savings in the United States has been well-documented. For example, in 2013 roughly one-third of households near retirement lacked either a defined benefit or defined contribution retirement plan (U.S. Government Accountability Office, 2015), and the median retirement account balance is $0 (Oakley, Brown, & Saad-Lesler, 2018). While this lack of savings is concerning, less clear is the relationship between retirement security and a household’s sense of financial well-being. To that end, this study uses the nationally representative 2017 Survey of Household Economics and Decisionmaking to investigate the relationship between both retirement security indicators and subjective financial well-being—as measured through the Consumer Financial Protection Bureau’s financial well-being scale—across the life course. Specifically, we use multiple regression approaches to compare how financial and knowledge-based indicators of retirement security contribute to the financial well-being of young, mid-career, and pre-retirement cohorts. Preliminary results indicate that feeling “on track” for retirement savings and comfort in making retirement savings decisions were among the strongest contributes to a sense of financial well-being across age cohorts. However, these indicators were particularly important to the financial well-being of older households. Surprisingly, having a 401(k), IRA or pension had no significant impact on savings when controlling for other factors. This study speaks to the importance of both providing effective retirement savings tools, including both educational and financial resources, at multiple points across the life course. It also contributes to a small but growing literature on the intersections between subjective financial well-being and financial decisionmaking.

The effect of market returns and volatility on investment choices in Chile’s defined contribution retirement plan

This study examines the trading behavior of active investors in Chile’s defined contribution retirement program in response to changes in market returns and volatility from 2007 to 2013, a period that included the Global Financial Crisis. Monthly trading among active investors increased when returns were negative but decreased with greater volatility, though less so during the crisis. The active affiliates tended to move to less risky funds when returns were negative and vice versa. However, higher volatility tended to increase risk taking but again less so during the crisis. Later, recommendations of an investment advisory service had significant effects on the investment behavior of some affiliates. Given the generally poor returns to active investors, the study ends with suggestions for improving Chile’s retirement program.

The SECURE Act: Retirement Plan Distributions after the Death of a Beneficiary

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 made very significant changes to required minimum distributions (RMDs) paid to beneficiaries of defined contribution retirement plans, including IRAs. The Act generally applies to beneficiaries of a defined contribution plans if the plan participant dies after 2019. The most significant provisions of the Act limit RMDs that are life or life expectancy distributions. Life-expectancy RMDs are now available only for eligible designated beneficiaries (EDBs). EDBs are defined as (1) the surviving spouse of a plan participant, (2) a minor child of the participant, (3) a disabled individual, (4) a chronically ill individual, or (5) an individual who is not more than ten years younger than the participant. The Act also replaced the alternative five-year distribution rule with a comparable ten-year rule. Under the new ten-year rule, a plan is required to distribute the participant’s entire benefit before the end of the tenth calendar year after the participant’s death. The Act also generally requires a plan to distribute all the plan’s remaining benefit before the end of the tenth calendar year following the death of an EDB who was receiving distributions over his or her life expectancy. The Act imposes a similar rule on the post-2019 death of a designated beneficiary in a plan that otherwise would not be subject to the Act because the participant died before 2020. These distributions required after the death of an EDB (or a designated beneficiary in a pre-2020 plan) are referred to in this Article as successor ten-year distributions. They are the focus of the Article. A major problem may occur on the death of an EDB in a plan with multiple EDBs. In addition to applying the successor ten-year rule to the benefit of the deceased EDB, the SECURE Act will also generally apply the rule to the interests of the other living EDBs. The underlying theory is that a plan is allowed only one method for payment of RMDs, and the SECURE Act imposes that method upon the death of an EDB. Solutions to the problem of multi-beneficiary plans lie in the ability of a participant or trustee to divide a plan into separate accounts for each beneficiary. If such a separation is timely, the death of an EDB in one separate account should not affect the method or period under which RMDs are being made from the separate accounts of other EDBs. Unfortunately, the separate account solution generally does not work for multiple EDBs who are beneficiaries in a “see-through” trust. The interest of a see-through trust in a plan cannot be divided into separate accounts for trust beneficiaries. Instead, the solution lies in the proper creation of separate subtrusts for each beneficiary that insulate the plan interests of living EDBs from the successor ten-year rule applicable to the interest of a deceased EDB. Note though that, in some unique circumstances, a special type of trust allowed by the SECURE Act, an “applicable multi-beneficiary trust” (AMBT) may provide a more convenient way to divide a trust into separate subtrusts. Similar solutions that limit the effect of the successor ten-year rule may also be available for designated beneficiaries in a pre-2020 plan that is otherwise not subject to the SECURE Act.

Financial Advice, Plan Choice, and Retirement Plan Satisfaction

Most private sector employees have access to defined contribution retirement plans while public sector employees often may choose defined benefit or defined contribution plans. This research utilized a survey of faculty to analyze retirement plan satisfaction. Advice from a financial planner was positively associated with satisfaction with portability. Retirement plan knowledge was negatively associated with satisfaction with the decision period. Selection of a defined benefit plan was positively related to four aspects of satisfaction and negatively related to regret. Financial planners assisting individuals who face such choices should acknowledge the decision's challenges and evaluate the client's level of retirement planning knowledge. Focusing on long-term goals and the client's investment and mobility risk tolerance may be helpful, especially after market corrections.

Required Minimum Distributions

Required minimum distributions (RMDs) are an important part of individual requirement accounts and defined-contribution retirement plans including 401(k), 403(b) and 457(b) plans. Such plans are intended to provide retirement income for the account owner and his or her spouse. They are not intended to pass untaxed wealth on to the next generation. RMDs do that by requiring that a portion of the balance in an account is distributed (and taxed) each year beginning by age 70½ (recently extended to age 72). This article examines the origins and extensions of RMDs, how they are calculated and how they work. It then assesses the recently enacted SECURE Act and the proposed updated Internal Revenue Service tables of the life-expectancy factors used to calculate the amount of the annual RMDs.

Public Sector Pensions and the Covid-19 Shock

The 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES) awarded $200 billion in federal aid to the states to support spending for core areas including general relief, education, and mass transit. As revenue pressures mount in the coming months Congress may provide further aid to state and local governments. Nevertheless, financial support for key services such as health, welfare, and public safety should not be allowed to morph into a more generalized bailout of state and local pension plans. The most serious pension funding gaps are largely the result of failures to undertake meaningful pension reforms over the course of the past decade. Any future federal aid packages that might be used to meet pension plan obligations should be conditioned on structural pension reforms. Conditions for federal assistance should include a de-risking of public pensions’ overly aggressive investment strategies, a freezing of pension plans to future benefit accruals, and the establishment of alternate defined contribution retirement plans for affected public sector employees.

Are You Saving for Retirement? Racial/Ethnic Differentials in Contributory Retirement Savings Plans.

How individuals and families accumulate retirement resources during working years is a key aspect of aging with implications for later life. This study examines how much, and by what mechanisms, savings in retirement plans vary by race/ethnicity. Using representative survey data and linked W-2 tax records, we estimate the probability of participation in employer-sponsored defined contribution (DC) retirement plans with probit regression, and contribution levels with ordinary least squares (OLS) models. We use Heckman models to adjust for potential sample selection. Black and Hispanic workers have lower participation and contributions in employer-sponsored DC retirement plans than do white workers, while Asian Americans have higher levels. The bulk of racial/ethnic differences is attributed to socioeconomic position, especially education and labor market circumstances like earnings. Differentials are also associated with family circumstances, namely for black workers. After accounting for education, labor market, and family covariates, social-psychological factors appear to explain only small portions of differences, especially for black and Hispanic. This study clarifies how racial/ethnic disparities in socioeconomic circumstances generate advantages and disadvantages in retirement wealth accumulation. Lower DC retirement plan participation and contributions among minorities in work life represent an underappreciated earlier-life channel through which racial inequalities in income and wealth in later life are generated.

The Inattentive Participant: Portfolio Trading Behavior in 401(K) Plans

Most workers in defined contribution retirement plans are inattentive portfolio managers: only a few engage in any trading at all, and only a tiny minority trades actively. Using a rich new dataset on 1.2 million workers in over 1,500 plans, we find that most 401(k) plan participants are characterized by profound inertia. Almost all participants (80%) initiate no trades, and an additional 11% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers. Those who trade in their 401(k) plans are more affluent older men, with higher incomes and longer job tenure. They tend to use the internet for 401(k) account access, hold a larger number of investment options, and are more likely to hold active equity funds rather than index or lifecycle funds. Some plan features, including offering own-employer stock, also raise trading levels.

Under the Dome – A Closer Look at Legislative Proposals Impacting Retirement

How much might some of the recent legislative proposals for expanding access to employer sponsored retirement plans improve retirement income adequacy for current workers? This paper examines this by simulating the impact of some of the more important aspects of current legislative proposals, including: • Requiring retirement plans for all but the smallest employers. • Covering part-time employees. • Introducing auto portability. • Providing the option of guaranteed income for life from 401(k) and 403(b) plans. • Allowing open multiple employer plans (MEPs). • Modifying required minimum distributions. Previous research has shown that eligibility for participation in a defined contribution (DC) plan can have a significant impact on reducing retirement savings shortfalls. The analysis considers all workers (both eligible and ineligible) and gives the average individual retirement income deficits by the number of future years of eligibility for coverage in a defined contribution retirement plan. The deficit value for those in the youngest cohort (ages 35–39) assumed to have no future years of eligibility (as if they were never simulated to be employed in the future by an organization that provides access to those plans) is $78,046 per individual. That shortfall decreases substantially to $44,546 for those with one to nine years of future eligibility and even further to $27,830 for those with 10–19 years of future eligibility. Households in this age cohort fortunate enough to have at least 20 years of future eligibility in those programs have their average shortfall at retirement reduced to only $14,638. In other words, workers ages 35–39 with no future eligibility in a DC plan have a deficit more than five times higher than those with at least 20 years of future eligibility. The analysis shows the reduction in retirement deficits by age for three different coverage enhancements. Enhancement A assumes all employers are required to offer DC plans, save those with fewer than 10 employees. This analysis assumes that all new plans would be auto-IRAs with a 6 percent default contribution rate that escalates by 1 percent per year until it reaches 10 percent of pay. Based on experience observed from OregonSaves, a 30 percent opt-out is assumed for all new eligibles. • As expected, the youngest age cohort (35–39) would have the largest benefit — a 15.2 percent decrease in retirement deficit — since they would be exposed to the enhanced coverage for a long period of time. • Those in the 40–44 age cohort are simulated to have a 12.4 percent reduction in deficit. • Those 45–49 are simulated to have a 10.3 percent reduction in deficit. • Cohorts over 50 are also simulated to have reductions in retirement deficits; however, the reductions are less than 10 percent. Enhancement B is similar to Enhancement A, but with a cap on auto-escalation of 15 percent of pay. • In this case, the youngest cohort (those ages 35–39) is simulated to have a 17.0 percent reduction in retirement deficit. • Those in the 40–44 age cohort are simulated to have a 14.2 percent reduction in deficit. • Those ages 45–49 are simulated to have an 11.7 percent reduction in deficit. • Cohorts over age 50 are also simulated to have reductions in retirement deficits that are less than 10 percent. Enhancement C is similar to Enhancement B, except that all non-excludable employees are covered. • In this case, the youngest cohort (those ages 35–39) is simulated to have a 17.3 percent reduction in retirement deficit • Those in the 40–44 age cohort are simulated to have a 14.5 percent reduction in deficit. • Those 45–49 are simulated to have an 11.9 percent reduction in deficit • Cohorts over age 50 are simulated to have reductions in retirement deficits, but they are still less than 10 percent.

Alternative Realities: The Impact of Extreme Changes in Defined Contribution Plans on Retirement Income Adequacy in America

In recent years there have been a number of policy proposals that call into question the value of existing defined contribution plans. However, the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households. Previous research by the Employee Benefit Research Institute (EBRI) has provided some tangential evidence with respect to the potential impact. In 2014 EBRI provided simulation analysis of the serious error introduced by models that ignored future contribution activity from defined contribution plans. In 2017 EBRI produced simulation results showing that, if there were no employer-sponsored retirement plans (defined benefit as well as defined contribution) and individuals were assumed to behave in the manner observed for those with no access to such plans, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71 percent). In contrast, this Issue Brief provides a comprehensive exploration of the impact on retirement income adequacy for various cohorts of American households if defined contribution retirement plans were completely eliminated. As expected, the results are significantly greater for younger cohorts, since they would lose potential access to defined contribution plans for a longer period. The youngest age cohort (those currently ages 35–39) would suffer the most, with average retirement deficits increasing 23 percent from $49,182 to $60,253. Older cohorts would experience less of an impact: those ages 40–44 would have an increase of 18 percent, while those ages 45–49 would have a 13 percent increase. The average deficits for households above age 50 would increase but by less than 10 percent. The results are also analyzed by preretirement income quartile and breakouts into the following categories: single male, single female, widow, and widower. We find that elimination of defined contribution plans would have the most negative impact on single females. The Issue Brief then analyzes the opposite end of the defined contribution access spectrum by exploring the impact of a universal defined contribution scenario where every employer (with the exception of those that already sponsor a defined benefit plan) is assumed to sponsor a defined contribution plan. Again in this scenario, the youngest age cohort and single females would experience the largest change in retirement income adequacy. The youngest age cohort would benefit the most from this scenario, with average retirement deficits decreasing 24 percent from $49,182 to $37,506. Older cohorts would experience less of an impact: those ages 40–44 would have a decrease of 19 percent, while those ages 45–49 would have a 16 percent decrease and those ages 50–54 would have a 12 percent decrease. The average deficit for households above age 55 would decrease but by less than 10 percent.

Simplifying Choices in Defined Contribution Retirement Plan Design

In view of the growth and popularity of defined contribution pensions, along with the government’s growing attention to retirement plan costs and investment choices provided, it is important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.