Abstract

http://ssrn.com/abstract=1152392
 
 

References (22)



 
 

Citations (6)



 


 



The Impact of PPA on Retirement Savings for 401(k) Participants


Jack VanDerhei


Employee Benefit Research Institute (EBRI)

Craig Copeland


Employee Benefit Research Institute (EBRI)


EBRI Issue Brief, No. 318, June 2008

Abstract:     
This paper simulates (under several assumptions) the likely impact of 401(k) plan sponsors switching from voluntary enrollment systems to automatic enrollment designs with automatic escalation of contributions for a significant portion of workers (not just current 401(k) participants or those eligible to participate). This analysis indicates that even under the most conservative assumptions for auto-escalation of contributions, switching 401(k) plans to auto-enrollment is likely to have a very significant positive impact in generating additional retirement savings for many workers, especially for low-income workers. When results are aggregated across all income categories, the increase in the value of 401(k) accumulations at age 65 as a multiple of final earnings for those currently ages 25-29 would be approximately 2.4 to 2.6 times final salary by switching from voluntary enrollment to automatic enrollment. Although the aggregate results favor automatic enrollment, distributional analysis of the differences between the two systems indicates that the higher paid are not likely to benefit as much from such a change.

The median 401(k) accumulations for the lowest-income quartile of these workers (assuming all 401(k) plans were voluntary enrollment) would only be 0.1 times final earnings at age 65 (this is largely due to the fact that 41 percent of workers - as opposed to participants - were assumed to have zero balances at age 65). However, if all 401(k) plans are assumed to be using the auto-enrollment provisions under PPA, the median 401(k) accumulations for the lowest-income quartile jumps to 2.5 times final earnings under the most conservative assumptions and 4.5 times final earnings under the most beneficial assumptions. Even for the top 25 percent of these workers (when ranked by 401(k) accumulations as a multiple of final earnings), there are large increases: the multiple under a voluntary enrollment scenario is 1.8 times final earnings, whereas auto-enrollment provides multiples ranging from 6.5 to 10.4, depending on auto-escalation of contributions. Comparing income replacement targets generated in previous EBRI work with these simulated 401(k) accumulations shows that, even with the large increases that can be expected for many workers under the safe harbor auto-enrollment plans introduced by PPA, and with current-law Social Security benefits, additional resources will still be needed for some of them.

Number of Pages in PDF File: 24

Keywords: Employment-based benefits, Pension plan coverage, Pension plan design, Retirement income, Savings

JEL Classification: J26, J33

working papers series


Download This Paper

Date posted: June 28, 2008  

Suggested Citation

VanDerhei, Jack and Copeland, Craig, The Impact of PPA on Retirement Savings for 401(k) Participants. EBRI Issue Brief, No. 318, June 2008. Available at SSRN: http://ssrn.com/abstract=1152392

Contact Information

Jack VanDerhei (Contact Author)
Employee Benefit Research Institute (EBRI) ( email )
1100 13th Street, NW
Suite 878
Washington, DC 20005-4204
United States
HOME PAGE: http://www.ebri.org

Craig Copeland
Employee Benefit Research Institute (EBRI) ( email )
1100 13th Street, NW
Suite 878
Washington, DC 20005-4204
United States
202-775-6356 (Phone)
202-775-6312 (Fax)

Feedback to SSRN


Paper statistics
Abstract Views: 748
Downloads: 75
Download Rank: 187,837
References:  22
Citations:  6

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.250 seconds