Can 401(k) accumulations generate significant income for future retirees?

This Issue Brief develops a model that project the proportion of an individual's preretirement income that might be replaced by 401(k) plan accumulations at retirement, under several different projected scenarios. The 401(k) participant behaviors in the model are based on the year-end 2000 database collected by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) in their collaborative effort known as the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. The most significant factor affecting projected replacement rates at retirement is having access to a 401(k) plan. Projected replacement rates from 401(k) accumulations at retirement are reduced significantly when participants are not offered a 401(k) plan in all portions of their careers. Most 401(k) participants tend to have contributions in any given year. Thus, projecting that participants always have contributions (their own and/or employer contributions) every year raises projected replacement rates, but not by much compared with the importance of being offered a plan to begin with. The model simulations show that participant activities such as taking loans, taking preretirement withdrawals, or cashing out account balances at job change reduce projected 401(k) accumulations and thus replacement rates at age 65. Because loans are forecast to be paid back to the account in full, their effect on replacement rates at retirement in the model is the smallest. Even if equity returns in the future are projected to replicate the worst 50-year segment in the Standard & Poor's (S&P) 500 history (1929 to 1978), 401(k) accumulations are still projected to replace significant proportions of projected preretirement income. Another projection scenario forecasts participants experiencing a simulated three-year bear market (negative equity returns) either early in their careers, near the middle of their careers, or at the end of their careers. Forecasts of the effects of bear markets on 401(k) balances show that a bear market in equities is projected to have the largest effect the closer it occurs to age 65 (retirement), even though older participants typically have diversified their portfolios away from equities. A three-year bear market for those early in their careers would reduce median replacement rates from 401(k) accumulations by an estimated 2.9-3.7 percentage points, compared with 13.4-17.7 percentage points for those immediately before retirement. Similarly, a simulated three-year bull market (positive equity returns) is projected to have a larger positive effect on projected account balances and replacement rates the closer it occurs to retirement.     

Questions and answers on employee benefit issues

This Issue Brief addresses 19 topics in the areas of pensions, health insurance, and other benefits. In addition to the topics listed below, the report includes data on the prevalence of benefits, tax incentives associated with benefits, lump-sum distributions, number of private pension plans, pension coverage rates, 401(k) plans, employer spending on group health insurance, self-insured health plans, employer initiatives to reduce health care costs, and employers' response to the retiree health benefits accounting rule, and flexible benefits plans. In 1992, U.S. employers (public and private) spent $629 billion for noncash benefits, representing nearly 18 percent of total compensation, excluding paid time off. In 1992, 71 percent of the 50.1 million individuals aged 55 and over received retirement benefits, including distributions from private and public pensions, annuities, individual retirement accounts, Keoghs, 401(k)s, and Social Security. Among the 76 percent of all private pension plan participants who participated in a single plan, 30 percent named a defined benefit plan as their pension plan type, 58 percent named a defined contribution plan as their pension plan type, and 12 percent did not know their plan type. Private and public pension funds held more than $4.6 trillion in assets at the end of 1993. The 1993 year-end assets are more than triple the asset level of 1983 (nominal terms). According to the Congressional Budget Office, U.S. expenditures on health care were expected to have reached $898 billion in 1993, up from $751.8 billion in 1991, an increase of 19.4 percent in nominal terms.     

Retirement plans, personal saving, and saving adequacy

This Issue Brief addresses three questions raised by recent trends in personal saving: How are national savings measured and what is the meaning of the trends in measured personal saving rates, given what is included and what is not included in those measures? What is the effect of retirement saving programs--in particular, 401(k) plans and individual retirement accounts (IRAs)--on personal saving levels? What are the implications of existing saving behavior for the retirement income security of today's workers? The National Income and Product Accounts (NIPA), the most commonly referenced gauge of personal saving, is a widely misunderstood measure. One could argue that a complete measure of saving would include increases in wealth through capital gains, but NIPA does not factor accrued and realized capital gains on stocks and other assets into the saving rate. By one measure, accounting for capital gains results in an aggregate personal saving rate of 33 percent--more than double the rate of four decades ago. A major policy question is the impact of tax-qualified retirement saving plans (i.e., IRAs and 401(k) plans) on personal saving rates. Empirical analysis of this issue is extremely challenging and findings have been contradictory. These programs now represent an enormous store of retirement-earmarked wealth in tax-deferred vehicles: Combined, such tax-deferred retirement accounts currently have assets of about $4 trillion. Ninety percent of IRA contributions are now the result of "rollovers" as employees leave employer plans, like 401(k) plans. While leakage from the system remains a challenge, the majority of the assets in the system can be expected to be available to fund workers' retirements. One could argue that, from a retirement income security perspective, workers in general are better off because IRA and 401(k) programs exist. Surely, many of the dollars in these programs would have been saved even without the programs; but they would not necessarily have been earmarked for retirement and been available to fund retirement expenses. As rollovers become larger, this "partnership" of employment-based qualified plans and IRAs will grow even more important. The evidence indicates that many groups of American workers appear unlikely to be able to afford a retirement that maintains their current lifestyle (at least not without working more years than currently planned). Consensus does not exist on how many workers are at risk or the typical magnitude of their retirement saving shortfall. There is a consensus, however, that a substantial number of individuals are at risk. This is not surprising--despite the fact that the 70 percent of workers are saving for retirement--since relatively few workers know how much it is that they need to accumulate to fund their retirement.     

401(k) plan asset allocation, account balances, and loan activity in 2009

CONSISTENT SAMPLE: Because 401(k) balances can fluctuate with market returns from year to year, meaningful analysis of 401(k) plans must examine how participants' accounts have performed over the long term. Looking at consistent participants in the EBRI/ICI 401(k) database over the six-year period from 2003 to 2009 (which included one of the worst bear markets for stocks since the Great Depression), the study found: After rising in 2003 and for the next four consecutive years, the average 401(k) retirement account fell 27.8 percent in 2008, before rising 31.9 percent in 2009. The average 401(k) account balance moved up and down with stock market performance, but over the entire six-year time period increased at an average annual growth rate of 10.5 percent, attaining $109,723 at year-end 2009. The median (or midpoint, half above and half below) 401(k) account balance increased at an average annual growth rate of 14.7 percent over the 2003-2009 period to $59,381 at year-end 2009. THE BULK OF 401(K) ASSETS CONTINUED TO BE INVESTED IN STOCKS: On average, at year-end 2009, 60 percent of 401(k) participants' assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Thirty-six percent was in fixed-income securities such as stable-value investments and bond and money funds. MORE THAN THREE-QUARTERS OF 401(K) PLANS INCLUDED TARGET-DATE FUNDS IN THEIR INVESTMENT LINEUP AT YEAR-END 2009: At year-end 2009, nearly 10 percent of the assets in the EBRI/ICI 401(k) database was invested in target-date funds and 33 percent of 401(k) participants held target-date funds. Also known as lifecycle funds, they are designed to simplify investing and to automate account rebalancing. NEW EMPLOYEES CONTINUED TO USE BALANCED FUNDS, INCLUDING TARGET-DATE FUNDS: Across all but the oldest age group, more new or recent hires invested their 401(k) assets in balanced funds, including target-date funds. At year-end 2009, about 42 percent of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with 36 percent in 2008, and about 7 percent in 1998. At year-end 2009, 31 percent of the account balances of recently hired participants in their 20s was invested in lifecycle funds, compared with almost 23 percent at year-end 2008. 401(K) PARTICIPANTS CONTINUED TO SEEK DIVERSIFICATION OF THEIR INVESTMENTS: The share of 401(k) accounts invested in company stock continued to shrink, falling by half of a percentage point (to 9.2 percent) in 2009. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend: They tended to be less likely to hold employer stock. PARTICIPANTS' 401(K) LOAN ACTIVITY ROSE IN 2009: In 2009, 21 percent of all 401(k) participants eligible for loans had a loan outstanding against their 401(k) account, compared with 18 percent at year-end 2008 and year-end 2007. Loans outstanding amounted to 15 percent of the remaining account balance, on average, at year-end 2009, compared with 16 percent at year-end 2008. Loan amounts remained in line with the past few years in terms of typical dollar amounts.     

The changing face of private retirement plans

A rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the "baby boom" generation, will have adequate retirement incomes. One reason is that Social Security's projected long-term financial shortfall could result in a reduction in the current-law benefit promises made to future generations of retirees. Another reason is that many baby boomers will be retiring with employment-based defined contribution (DC) plans, as opposed to the "traditional" defined benefit (DB) plans that historically have been the predominant source of employer-provided retirement income. These factors are likely to reduce the amount of life annuity benefits that future retirees will receive relative to current retirees, raising questions as to whether other sources of retirement income--such as individual account plans (DC plans and individual retirement accounts, or IRAs)--will make up the difference. This Issue Brief highlights the changes in private pension plan participation for DB and DC plans and provides some possible explanations for these changes. Results are presented from the Employee Benefit Research Institute's (EBRI) Retirement Income Projection Model that quantify how much the importance of individual account plans is expected to increase because of these changes. This Issue Brief also discusses the risk of outliving one's assets, since a greater fraction of pension wealth is projected to come from "nonguaranteed" sources. Results of the model are compared by gender for cohorts born between 1936 and 1964 in order to estimate the percentage of retirees' retirement wealth that will be derived from DB plans versus DC plans and IRAs over the next three decades. Under the model's baseline assumptions, both males and females are found to have an appreciable drop in the percentage of private retirement income that is attributable to defined benefit plans (other than cash balance plans). In addition, results show a clear increase in the income retirees will receive that will have to be managed by the retiree. This makes the risk of longevity more central to retirees' expenditure decisions. The implications of these model results for retirees are significant. First, individuals--rather than the pension plan sponsor--increasingly will have to manage their retirement assets and bear the risk of investment losses. Second, since most retirees' non-Social Security retirement income will be distributed as a lump sum or in periodic payements (from a defined contribution plan or IRA) rather than as a regular paycheck for life (from a defined benefit plan), retirees will need either to purchase an annuity from an insurance company or carefully manage their individual rate of spending in order to avoid outliving their assets.     

Lessons from the evolution of 401(k) retirement plans for increased consumerism in health care: an application of behavioral research

Employment-based health and retirement benefit programs have followed a similar path of evolution. The relative decision-making roles of the employer and the worker have shifted from the employer to the worker, and workers are more responsible than perhaps they ever have been for their well being--both in terms of their health in general and their financial security during retirement. This shift has been supported, in part, by legislation--namely ERISA, the HMO Act of 1973, the Revenue Act of 1978, and most recently, the Pension Protection Act. This Issue Brief does not pass judgment on this development or address who should bear the responsibilities of preparing workers for retirement or of rationing health care services. The current trend in health care design is toward increased "consumerism." Consumer-driven health is based on the assumption that the combination of greater cost sharing (by workers) and better information about the cost and quality of health care will engage workers to become better health care decision makers. It is hoped that workers will seek important, necessary, high-quality, cost-effective care and services, and become less likely to engage providers and services that are unnecessary and ineffective from either a quality or cost perspective. As employers look ahead toward continually improved plan design, there may be benefits in considering the lessons learned from studying worker behaviors. Specifically, there is evidence about the effects of choice, financial incentives, and information on worker decision making. As a result of research in this area, many retirement plan sponsors have moved toward plan designs and programs that recognize the benefits of well-designed defaults, simplified choices, required active decision making, framing, and commitment to future improvements. With respect to choice, it is now known that more is not always better and may even be worse in some cases. Just as fewer shoppers actually bought a jar of jelly when it was one of 24 as opposed to one of six, evidence has shown that people tend to be less likely to join a company-sponsored retirement plan when more investment options are offered. More choice can also lead to lower satisfaction. It is also known that workers may not be able to appropriately sort through many complex alternatives and that education is not always as effective as employers would hope. Decision complexity often forces people to find a way to simplify, and one of the easiest rules of thumb is to pick the option with the lowest short-term cost, even when that alternative is more costly in the longer run. It is also known that, for good or for bad, choices are constructed on the fly; preferences are dynamic, and logic does not always apply. Financial incentives are helpful in motivating behavior, but they do not affect everyone's decisions. Despite significant financial incentives to participate in 401(k) plans, many workers choose not to. Similarly, despite many of the financial incentives embedded in health care plan design, it can be expected that these incentives will not effectively motivate and engage all workers. One seemingly rational approach to improve workers' decision making is to provide education and guidance to help them sort through complex alternatives and to demonstrate the value of financial incentives. Certainly, providing education and guidance in the form of decision support tools may be an employer's responsibility. However, some studies have shown that, even when "educated" workers have the intent to make improved decisions, they often lack follow-through and fail to take action. In short, education and guidance may not be enough to foster improved health care consumerism. Some employers have begun to design benefit programs with a view toward overcoming behavioral tendencies that negatively affect workers' well-being. Newer retirement plan designs involve careful consideration of default choices. These defaults apply unless workers actively choose a different alternative. Typically, the default attempts to "nudge" workers toward optimal behavior. In the case of 401(k) retirement plan design, more employers are moving toward a default of automatic enrollment in the plan, with automatic investment in a diversified portfolio. Still, additional empirical research and experimentation may be needed to further understand the effects of new retirement plan design features. Future work may also precisely illuminate how the lessons discussed in this Issue Brief may apply to health care plan design that results in improved health-related behaviors. Given the impressive preliminary results in improving retirement planning behaviors, such research and experimentation are likely to be worthwhile.     

Sources of health insurance and characteristics of the uninsured: analysis of the March 2007 Current Population Survey

This Issue Brief provides historic data through 2006 on the number and percentage of nonelderly individuals with and without health insurance. Based on EBRI estimates from the U.S. Census Bureau's March 2007 Current Population Survey (CPS), it reflects 2006 data. It also discusses trends in coverage for the 1994-2006 period and highlights characteristics that typically indicate whether an individual is insured. HEALTH COVERAGE CONTINUES DECLINE: The percentage of the nonelderly population (under age 65) with health insurance coverage continued to decline, reaching to a post-1994 low of 82.1 percent in 2006. Declines in health insurance coverage have been recorded in all but four years since 1994, when 36.5 million nonelderly individuals were uninsured; in 2006, the uninsured population was 46.5 million. EMPLOYMENT-BASED COVERAGE REMAINS DOMINANT SOURCE OF HEALTH COVERAGE: Employment-based health benefits remain by far the most common form of health coverage in the United States, consistently covering 60-70 percent of nonelderly individuals. In 2006, 62.2 percent of the nonelderly population had employment-based health benefits, as compared with 64.4 percent in 1994. Between 1994 and 2000, the percentage of the nonelderly population with employment-based coverage expanded. Since 2000, the percentage has declined. PUBLIC PROGRAM COVERAGE IS STABLE: Public-sector health coverage was slightly lower as a percentage of the population in 2006, accounting for 17.5 percent of the nonelderly population. The decline was due to a drop in the percentage of the population covered by the Tricare/CHAMPVA program. Enrollment in Medicaid and the State Children's Health Insurance Program increased, reaching 34.9 million in 2006, and covering 13.4 percent of the nonelderly population, which is significantly above the 10.5 percent level of 1999, but not far above the 12.7 percent level of 1994. INDIVIDUAL COVERAGE STABLE: Individually purchased health coverage was unchanged in 2006 and has basically hovered in the high 6 and low 7 percent range since 1994. PRIVATE- VS. PUBLIC-COVERAGE TRENDS REVERSING: Health insurance coverage generally has not sustained unbroken trends since 1994. There were crosscurrents: Employment-based coverage expanded significantly in the 1994-2000 period to exceed the growth in public programs. Subsequently, the dynamic reversed, as public programs expanded while employment-based coverage declined. It appears that 2005 might be the beginning of a new trend, where the erosion in employment-based coverage is not being offset by expansions in public programs. This may be due to the fact that, while unemployment is relatively low, the cost of providing health benefits continues to increase faster than inflation.     

IRA balances and contributions: an overview of the EBRI IRA database

NEW IRA DATABASE: The Employee Benefit Research Institute created the EBRI IRA Database in order to more closely examine retirement savings behavior. The EBRI IRA Database is able to link individuals within and across the data providers and will also be able to link the data with participants in 401(k) plans, allowing retirement funds to be tracked as they are generated, rolled over, and ultimately used. This Issue Brief is the first of a series of publications analyzing the EBRI IRA Database, and highlights the distribution of IRA owners by IRA type, average and median account balances, and contributions to IRAs. The data security techniques used by the data providers assure that EBRI has no ability to identify individuals so that all privacy is assured. IRA TYPES: In the EBRI IRA Database, IRAs are classified into four types: traditional (originating from contributions), rollovers from other retirement plans, Roth, and SEP/SIMPLE. The distribution of the IRA accounts is 33.6 percent traditional IRAs; 33.4 percent rollover IRAs (combined with the traditional IRAs, 67 percent); 23.4 percent Roth IRAs; the remaining 9.6 percent are SEPs and SIMPLEs. OWNERSHIP BY AGE AND GENDER: IRA owners were more likely to be male, especially those having a rollover or a SEP/SIMPLE IRA. Among all IRA participants in the database, nearly one-half (48.3 percent) were ages 45-64. Only 16.7 percent of those owning a traditional IRA were under age 45, compared with 46.5 percent for those with a Roth, 30.4 percent for rollovers, and 34.8 percent for those with a SEP or SIMPLE. AVERAGE AND MEDIAN BALANCES: The average and median IRA account balance in 2008 was $54,863 and $15,756, respectively, while the average and median IRA individual balance (all accounts from the same person combined) was $69,498 and $20,046, Individuals with a rollover balance had the highest average and median balance at $91,783 and $31,264. Roth owners had the lowest average and median balance at $14,056 and $7,319. The average and median individual IRA balance increased with age before leveling off for those age 70 or older. Averages--The average amount contributed to an IRA in the database was $3,665 in 2008. The average contribution was highest for accounts owned by those ages 65-69. More contributions were made to Roth accounts than to traditional (combined traditional and rollover) accounts. However, the average contribution to a traditional account was higher, at $3,798, compared with $3,580 to a Roth account. Yet, a higher overall amount was contributed to Roth IRAs ($3.4 billion for Roths compared with $2.3 billion for traditional accounts). By type--Focusing only on those owning traditional, rollover, or Roth IRAs, 12.1 percent of the accounts were contributed to, and 15.1 percent of the individuals owning these IRA types contributed to them in 2008. When combining the owners of traditional and rollover IRAs (which are considered the same type for contribution purposes), 7.2 percent contributed, while 29.5 percent of those owning a Roth IRA contributed to a Roth IRA. Maxing out--Of those individuals contributing, 42.4 percent contributed the maximum amount. Of those contributing to a traditional or rollover IRA, 43.4 percent maxed out, while 40.2 percent did so with a Roth IRA.     

401(k) plan asset allocation, account balances, and loan activity in 2010

THE BULK OF 401(K) ASSETS CONTINUED TO BE INVESTED IN STOCKS: On average, at year-end 2010, 62 percent of 401(k) participants' assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Thirty-three percent were in fixed-income securities such as stable value investments and bond and money funds. SEVENTY PERCENT OF 401(K) PLANS INCLUDED TARGET-DATE FUNDS IN THEIR INVESTMENT LINEUP AT YEAR-END 2010: At year-end 2010, 11 percent of the assets in the EBRI/ICI 401(k) database were invested in target-date funds and 36 percent of 401(k) participants held target-date funds. Also known as lifecycle funds, they are designed to offer a diversified portfolio that automatically rebalances to be more focused on income over time. MORE NEW OR RECENT HIRES INVESTED THEIR 401(K) ASSETS IN BALANCED FUNDS, INCLUDING TARGET-DATE FUNDS: For example, at year-end 2010, 44 percent of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with 42 percent in 2009, and about 7 percent in 1998. A significant subset of that balanced fund category is target-date funds. At year-end 2010, 35 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 31 percent at year-end 2009. 401(K) PARTICIPANTS CONTINUED TO SEEK DIVERSIFICATION OF THEIR INVESTMENTS: The share of 401(k) accounts invested in company stock continued to shrink, falling by more than a percentage point (to 8 percent) in 2010, continuing a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend: They tended to be less likely to hold employer stock. PARTICIPANTS' 401(K) LOAN BALANCES DECLINED SLIGHTLY IN 2010: In 2010, 21 percent of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from year-end 2009, and up from 18 percent at year-end 2008. Loans outstanding amounted to 14 percent of the remaining account balance, on average, at year-end 2010, compared with 15 percent at year-end 2009. Loan amounts outstanding declined slightly from those in the past few years. THE YEAR-END 2010 AVERAGE ACCOUNT BALANCE IN THE DATABASE WAS 3.4 PERCENT HIGHER THAN THE YEAR BEFORE, BUT MAY NOT ACCURATELY REFLECT THE EXPERIENCE OF TYPICAL 401(K) PARTICIPANTS IN 2010: To understand changes in 401(k) participants' average account balances, it is important to analyze a sample of consistent participants. As with previous EBRI/ICI updates, analysis of a sample of consistent 401(k) participants (those that have been in the same plan since 2003) is expected to be published in 2012.     

Contribution behavior of 401(k) plan participants

This Issue Brief examines the 1999 contribution behavior of 1.7 million 401(k) plan participants drawn from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. The findings in this paper build on previous academic research examining the contribution activity of 401(k) participants, by using a large sample of participants in a wide range of plan sizes and by examining in detail the factors that influence contribution activity. Eighty-five percent of participants in the sample only made before-tax contributions to their plans, and 97 percent of all dollars contributed by employees were contributed on a before-tax basis. On average, participants contributed 6.8 percent of their salaries on a before-tax basis. Before-tax contribution activity varied among participants. About 61 percent of participants contributed more than 5 percent of their salaries on a before-tax basis and about 21 percent set aside more than 10 percent of their salaries on a before-tax basis. Eleven percent of participants analyzed in this study earning more than $40,000 a year contributed at the $10,000 before-tax IRC limit in 1999. Thirteen percent of participants with salaries between $70,000 and $80,000 contributed at the cap, and 18 percent of those with salaries between $80,000 and $90,000 were at the limit. However, it appears that among participants not contributing at the IRC limit, 52 percent could not have done so because of formal plan-imposed contribution limits below the IRC limit. Older participants tended to contribute a higher percentage of their salaries to plans than did younger participants, even after factoring out differences in salary and job tenure. Participants tended to increase the share of their salary (and amounts) contributed to their 401(k) plan as their salaries rose until salaries reached $80,000. For individuals with salaries above $80,000, before-tax contribution rates (though not the amounts contributed) tended to fall as salaries rose because IRC, and possibly plan sponsor, contribution limits became binding for some participants. Giving employees the option of borrowing from their 401(k) accounts increased participant contribution rates. On average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision. Total contributions--the sum of employee and employer contributions--were higher for participants who received an employer contribution as part of their 401(k) plan than for those who did not. The average total contribution rate was 10 percent of salary for employees in plans offering an employer contribution, compared with 7.4 percent for those in plans not offering an employer contribution.     

State and local retirement plans: innovation and renovation

This Special Report/Issue Brief examines the universe of state and local retirement plans. It describes how these plans have developed and continue to evolve in a number of areas, including plan features, regulatory framework, governance, and asset management. While these retirement programs differ in many respects from private-sector plans, the disparity in some areas has narrowed. This report also includes a discussion of trends and the underlying forces for change. Public-sector retirement programs provide an important source of pension coverage in the United States, and are a significant part of the total retirement market: Combined public-sector retirement assets (state, local, and federal governments) comprised 29 percent of the $11.2 trillion U.S. retirement market in 1998. State and local plans are dominant in the public-sector retirement market, holding $2.7 trillion in assets, compared with $696 billion held by federal plans (both military and civilian). More than 16 million individuals are employed by state and local jurisdictions in the United States. State and local retirement plans share certain common features because of the environment in which they operate. Legal statutes, governance, and tradition all play a role in defining what is sometimes referred to as a "public-sector culture." Despite common features, there is considerable diversity among public-sector retirement plans. To attract and retain a skilled work force, public-sector employers have increased their use of defined contribution (DC) plans to supplement defined benefit (DB) plans (or, to a lesser extent, replace or serve as an alternative to them) and improve cost-of-living adjustments. At the same time, a combined federal-state regulatory framework has encouraged certain plan design features, unavailable in the private sector, which include multiple tiers for successive generations of employees in a single plan and different strategies to increase portability. State and local retirement plans reflect an increasing role by the federal government in pension system design and operation, which has led to greater complexity in such areas as Social Security participation and deferred compensation arrangements. Complexity can be expected to increase with the recent passage of P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001. The latest full-year data included in this report are for 1999 and in some cases 2000. After this report went to press, the Federal Reserve issued significantly revised quarterly data for state, local, and federal retirement plan assets, which were not incorporated in this Issue Brief.     

401(k) plan asset allocation, account balances, and loan activity in 1998

The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) have been collaborating for the past three years to collect data on participants in 401(k) plans. This effort, known as the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, has obtained data for 401(k) plan participants from certain of EBRI and ICI members serving as plan record keepers and administrators. The report includes 1998 information on 7.9 million active participants in 30,102 plans holding nearly $372 billion in assets. The data include demographic information, annual contributions, plan balances, asset allocation, and loans, and are broadly representative of the universe of 401(k) plans. The database also includes three years of longitudinal information on approximately 3.3 million participants. Key findings include: For all 401(k) participants in the 1998 EBRI/ICI database, almost three-quarters of plan balances are invested directly or indirectly in equity securities. Specifically, 49.8 percent of total plan balances are invested in equity funds, 17.7 percent in company stock, 11.4 percent in guaranteed investment contracts (GICs), 8.4 percent in balanced funds, 6.1 percent in bond funds, 4.7 percent in money funds, and 0.3 percent in other stable value funds. Participant asset allocation varies considerably with age. Younger participants tend to favor equity funds, while older participants are more disposed to invest in GICs and bond funds. On average, participants in their 20s have 62.1 percent of their account balances invested in equity funds, in contrast to 39.8 percent for those in their 60s. Participants in their 20s invest 4.7 percent of their assets in GICs, while those in their 60s invest 20.6 percent. Bond funds, which represent 4.7 percent of the assets of participants in their 20s, amount to 9.0 percent of the assets of participants in their 60s. Investment options offered by 401(k) plans appear to influence asset allocation. For example, the addition of company stock substantially reduces the allocation to equity funds and the addition of GICs lowers allocations to bond and money funds. The average account balance (net of plan loans) for all participants was $47,004 at year-end 1998, which is 26 percent higher than the average account balance at year-end 1996. The median account balance was $13,038 at year-end 1998. The balances, however, represent only amounts with current employers and do not include amounts remaining in the plans of prior employers. The average balances of older workers with long tenure indicate that a mature 401(k) plan program will produce substantial account balances. For example, individuals in their 60s with at least 30 years of tenure have average account balances in excess of $185,000. The ratio of account balance to 1998 salary varies with salary, increasing slightly as earnings rise from $20,001 to $80,000, and falling a bit for salaries greater than $80,000. The increase in ratio likely reflects a greater propensity of higher-income participants to save, whereas the decline after $80,000 results from contribution and nondiscrimination rule constraints.     

Sources of health insurance and characteristics of the uninsured: analysis of the March 2011 current population survey

LATEST CENSUS DATA: This Issue Brief provides historical data through 2010 on the number and percentage of nonelderly individuals with and without health insurance. Based on EBRI estimates from the U.S. Census Bureau's March 2011 Current Population Survey (CPS), it reflects 2010 data. It also discusses trends in coverage for the 1994-2010 period and highlights characteristics that typically indicate whether an individual is insured. HEALTH COVERAGE RATE CONTINUES TO DECREASE, UNINSURED INCREASE: The percentage of the nonelderly population (under age 65) with health insurance coverage decreased to 81.5 percent in 2010. Increases in health insurance coverage have been recorded in only three years since 1994, when 36.5 million nonelderly individuals were uninsured. The percentage of nonelderly individuals without health insurance coverage was 18.5 percent in 2010, up from 18.3 percent in 2009, and its highest level during the 1994-2010 period. EMPLOYMENT-BASED COVERAGE REMAINS DOMINANT SOURCE OF HEALTH COVERAGE, BUT CONTINUES TO ERODE: Employment-based health benefits remain the most common form of health coverage in the United States. In 2010, 58.7 percent of the nonelderly population had employment-based health benefits, down from 69.3 percent in 2000. SHIFTING COMPOSITION OF EMPLOYMENT-BASED COVERAGE: Between 2007 and 2010, the percentage of individuals under age 65 with employment-based coverage in their own name has dropped. In 2007, 54.2 percent had coverage in their own name. By 2010, it was down to 51.5 percent. Dependent coverage during this time period fell slightly from 17.5 percent to 17.1 percent, and increased slightly from 16.8 percent to 17.1 percent between 2009 and 2010. PUBLIC PROGRAM COVERAGE IS GROWING: Public program health coverage expanded as a percentage of the population in 2010, accounting for 21.6 percent of the nonelderly population. Enrollment in Medicaid and the State Children's Health Insurance Program increased, reaching a combined 45 million in 2010, and covering 16.9 percent of the nonelderly population, significantly above the 10.2 percent level of 1999. INDIVIDUAL COVERAGE STABLE: Individually purchased health coverage was unchanged in 2010 and has basically hovered in the 6-7 percent range since 1994. WHAT TO EXPECT IN 2011: 2010 is the most recent year for data on sources of health coverage. Unemployment in 2011 has been about 9 percent since the beginning of the year. While down from the 2010 average of 9.6 percent, it remains high and there is a continued threat of a double-dip recession increasing it even further. As a result, the nation is likely to see continued erosion of employment-based health benefits when the data for 2011 are released in 2012. Fewer working individuals translates into fewer individuals with access to health benefits in the work place, especially after COBRA subsidies have been exhausted.     

Sources of health insurance and characteristics of the uninsured: analysis of the March 2000 Current Population Survey

This Issue Brief provides summary data on the insured and uninsured populations in the nation and in each state. It discusses the characteristics most closely related to an individual's health insurance status. Based on EBRI estimates from the March 2000 Current Population Survey (CPS), it represents 1999 data--the most recent available. In 1999, for the first time since at least 1987, the percentage of Americans with health insurance increased: 82.5 percent of nonelderly Americans (under age 65) were covered by some form of health insurance, up from 81.6 percent in 1998. The percentage of nonelderly Americans without health insurance coverage declined from 18.4 percent in 1998 to 17.5 percent in 1999. The main reason for the decline in the number of uninsured Americans is the strong economy and low unemployment. Between 1998 and 1999, the percentage of nonelderly Americans covered by employment-based health insurance increased from 64.9 percent to 65.8 percent, continuing a longer-term trend that started between 1993 and 1994. In 1999, 34.1 million Americans received health insurance from public programs, and an additional 15.8 million purchased it directly from an insurer. Twenty-five million Americans participated in the Medicaid program, and 6.5 million received their health insurance through the Tricare and CHAMPVA programs and other government programs designed to provide coverage for retired military members and their families. Despite expansions in the State Children's Health Insurance Program (S-CHIP), public health insurance coverage did not increase overall between 1998 and 1999. The percentage of nonelderly Americans covered by Medicaid and other government-sponsored health insurance coverage did not change between 1998 and 1999, though some children benefited from expansions in government-funded programs. The percentage of children in families just above the poverty level without health insurance coverage declined dramatically, from 27.2 percent uninsured in 1998 to 19.7 percent uninsured in 1999. Some of the decline can be attributed to expansions in Medicaid and S-CHIP, but it appears that expansions in employment-based health insurance and individually purchased coverage had an even larger effect than expansion of S-CHIP. Even though the number and percentage of uninsured declined substantially between 1998 and 1999, more than 42 million Americans remain uninsured. As long as the economy is strong and unemployment is low, employment-based health insurance coverage will expand and the uninsured will decline gradually. If the economy continues to soften or comes close to a recession, the number of uninsured would easily and quickly start to increase again as unemployment rises. Should a severe downturn in the economy occur, causing the uninsured to represent 25 percent of the nonelderly population, 63 million Americans would be uninsured.     

Sources of health insurance and characteristics of the uninsured: analysis of the March 2001 Current Population Survey

This Issue Brief provides summary data on the insured and uninsured populations in the nation and in each state. It discusses the characteristics most closely related to an individual's health insurance status. Based on EBRI estimates from the March 2001 Current Population Survey (CPS), it represents 2000 data--the most recent available. Between 1999 and 2000, the percentage of Americans with health insurance increased: 84.1 percent of nonelderly Americans were covered by some form of health insurance in 2000, up from 83.8 percent in 1999. The percentage of nonelderly Americans without health insurance coverage declined from 16.2 percent in 1999 to 15.9 percent in 2000, continuing a trend that started between 1998 and 1999. The main reason for the decline in the number of uninsured Americans was the strong economy and low unemployment. Between 1999 and 2000, the percentage of nonelderly Americans covered by employment-based health insurance increased from 66.6 percent to 67.3 percent, continuing a longer-term trend that started between 1993 and 1994. In 2000, 34.3 million Americans received health insurance from public programs, and an additional 16.1 million purchased it directly from an insurer. More than 25 million Americans participated in Medicaid or the State Children's Health Insurance Program, and 6.1 million received their health insurance through the Tricare and CHAMPVA programs and other government programs designed to provide coverage for retired military members and their families. Even though the number and percentage of uninsured declined substantially between 1998 and 2000, more than 38 million Americans remain uninsured. While an increasing percentage of Americans were being covered by employment-based health plans, this trend may not continue because of the combined re-emergence of health care cost inflation and the weak economy. As long as the economy is strong and unemployment is low, employment-based health insurance coverage will expand and the uninsured will decline gradually. However, the combination of the current weak economy and the rising cost of providing health benefits will likely result in more Americans without health insurance coverage. Should the uninsured remain unchanged and continue to represent 15.9 percent of the nonelderly population, 40 million would be uninsured by 2005. If the uninsured represented 25 percent of the population, 63 million would be uninsured in 2005 and 65 million nonelderly Americans would be uninsured by 2010.     

Voluntary long-term care insurance: best practices for increasing employee participation

This is the second of two Issue Briefs (April and May 2000) on long-term care (LTC) insurance. The previous Issue Brief addressed the problem of increasing sponsorship, while this report addresses the issue of increasing employee participation. Participation rates in group LTC insurance plans tend to be low. A potential watershed event for the development of the employment-based group LTC market is the proposed LTC program for federal employees and retirees (a program that would have to be enacted by Congress). The perception of a successful offering to federal employees could provide an enormous boost to the group LTC insurance market. Employee communication and education are seen as critical to the success of LTC enrollments. The importance of support shown by an employer for a new LTC plan offering cannot be overstated. Unlike 401(k) plan participation trends, LTC participation rates are highest among large companies. Insurers tend to view the 40-60 age range as the primary target for group LTC insurance, and employee salary as the best predictor of LTC insurance enrollment. Higher educational levels also are associated with higher levels of LTC participation. Perceived need for LTC insurance is perhaps the biggest barrier to the purchase of LTC insurance by employees due to competing financial priorities and the fact that LTC issues are generally off the "radar screens" of younger employees. Plans with skilled nursing home and home care benefits experience higher participation rates than plans lacking these benefits. The availability of lower-cost and long duration benefit options can be an important factor in determining participation. Most sponsors have chosen to offer noncontributory (i.e., fully employee-paid) LTC plans. Employer reluctance to make contributions may be caused by HIPAA's prohibition on the inclusion of LTC insurance in cafeteria plans. One of the major advantages of group LTC plans is the availability of guaranteed issue (i.e., issuing coverage without requiring evidence of insurability) for employees, which is not available in the individual LTC market. It is easy for enrollment to be derailed by the presence of any of a number of harmful conditions, such as employer-sponsors who distance themselves from the offer, ineffective communications, or difficult enrollment processes. Achieving consistently strong levels of participation in LTC plans will require employer-sponsors and their insurance carriers to form strong partnerships, with worker participation as their primary stated goal.     

Health insurance portability: COBRA expansions and job mobility

This Issue Brief discusses continuation-of-coverage mandates under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). It provides background information on health insurance portability and job mobility, data on the cost to employers of providing continuation of coverage to former employees, and a summary of empirical research on COBRA's effect on employee benefits and job mobility. COBRA coverage can be considered advantageous for most workers, as it allows continuation of the health insurance policy they had in place at work when they lose or leave a job. Although employees can be required to pay 102 percent of the premium for COBRA coverage, they can usually realize significant savings compared with the cost of purchasing the equivalent insurance policy in the private market. Many employers consider COBRA to be a costly mandate for three reasons. First, premiums collected from COBRA beneficiaries typically do not cover the costs of the health care services rendered. Second, COBRA imposes an additional administrative cost on employers. Third, many employers view the penalties for noncompliance as excessively large. According to a survey conducted by Charles D. Spencer & Associates, of the 10.2 percent of employees and dependents who were eligible for COBRA coverage in 1996, over 28 percent elected it. In addition, average employer claims costs for COBRA beneficiaries amounted to $5,591, compared with $3,332 for active employees in surveyed plans. According to Employee Benefit Research Institute estimates of the Survey of Income and Program Participation (SIPP), the COBRA population is much older than the general insured population. COBRA beneficiaries also have higher personal income than the general insured population, with this difference being almost entirely due to differences in retirement income. Any attempt to expand COBRA coverage, either through subsidies or by allowing workers to choose from plans with lower premiums, would likely result in increased employer health care costs. As a result, employers may consider various alternatives to reduce, shift, or eliminate the impact of this increased cost. One alternative would be to continue requiring active employees to share in the increased costs through higher employee contributions. A second alternative would be to reduce or eliminate health care benefits for active employees and/or future retirees and their families. A third alternative would be to reduce the size of the work force eligible for health insurance benefits. Finally, employers may pass additional costs on to workers or consumers.     

Demographic and employment shifts: implications for benefits and economic security

This Issue Brief examines factors affecting the population's age distribution and composition, such as mortality rates, fertility rates, and immigration. In addition, it examines factors affecting labor force composition, such as immigration, increased labor force participation of women, and retirement trends, and discusses the potential impact of these changes on publicly financed programs: Medicare, Medicaid, Social Security, and federal employee retirement systems. The discussion also highlights the implications of these population and labor force changes on employers, employees, and retirees. The elderly population--now 31.8 million, representing 12.6 percent of the population--is projected to experience tremendous growth between 2010 and 2030, when the baby boom generation reaches age 65, rising from 39.7 million, or 13.3 percent of the population, to 69.8 million, or 20.2 percent of the population. Growth in the elderly population has implications for retirement and health care systems. Population projections suggest that the traditionally pyramid-shaped work force, with a proportionately greater number of younger workers than older workers, will be replaced with a more even age distribution. Consequently, significant and continued modifications to benefit packages, such as changes in compensation structures in which earnings automatically rise with age, are likely to occur. Women's labor force participation began to accelerate in the mid-1950s, rising 75 percent among women aged 25-44 in 1991, although there is some indication that this growth may be flattening. With women comprising a greater part of the labor force, employers will be encouraged to develop and implement programs to better accommodate their needs. Increased life expectancy, a decreased percentage of entry level workers, changes in Social Security's normal retirement age from 65 to 67, and employer plans to raise the normal age of retirement or provide incentives to delay retirement, could raise the average age of retirement. However, other factors, such as poor health, other sources of retirement income, and individual preferences for retirement, could still dominate the retirement decision. The combination of increased average life expectancy guaranteeing more years of retirement to finance and rising dependency ratios increases the future cost of Social Security financing. Medicare financing is also an important policy issue because the program is projected to experience financial difficulties in the short term, resulting from explosive health care costs. In addition, Medicaid expenditures are consuming increasing amount of shrinking state budget resources--a large portion of which is used to finance nursing home care for a growing elderly population.     

Questions and answers on health insurance benefit issues

This Issue Brief addresses eight topics in the areas of health insurance and health care costs. Using a question and answer format, the discussion draws largely on EBRI research and the EBRI Databook on Employee Benefits, third edition. In 1993, U.S. expenditures on health care were $884.2 billion, and they are projected to reach $2,173.7 billion by 2005, increasing at a projected average annual rate of 7.8 percent. Health care spending accounted for 13.9 percent of Gross Domestic Product (GDP) in 1993 and is projected to reach 17.9 percent of GDP by 2005. Among the factors contributing to the increase in health care costs are the growth in the number of individuals with traditional reimbursement health insurance coverage, the rapid expansion of technology and treatment options, and demographic factors such as the aging of the population. In 1993, employers, both public and private, spent $235.6 billion on group health insurance, accounting for 6.2 percent of total compensation. Group health insurance is the fastest growing component of total compensation, increasing at an average annual rate of 13.7 percent from 1960 to 1993. An increasing number of employees are required to make a cash contribution to their health insurance plan premium. In 1993, 61 percent of full-time employees in medium and large private establishments who participated in an employee only health insurance plan were required to make a contribution to the premium, up from 27 percent in 1979. In 1993, 185.3 million persons under age 65 had health insurance coverage, while 40.9 million people--or about 18.1 percent of the nonelderly population--received neither private health insurance nor publicly financed health coverage. Of those individuals who had health insurance coverage, 60.8 percent, or 137.4 million persons, received their health insurance through an employment-based plan. In 1993, 15.2 percent of the nonelderly population without health insurance coverage were noncitizens. In six states noncitizens represented a higher proportion of the total uninsured population than individuals in the nation as a whole. An increasing number of employers are self-funding their health insurance plans. In 1994, 74 percent of employers with 500 or more employees self-funded their health insurance plans, up from 63 percent in 1993. An estimated 22 million full-time employees in private industry and state and local governments participated in a self-funded employment-based health insurance plan.(ABSTRACT TRUNCATED AT 400 WORDS)