Workers Save More, But Could Fall Short

January 15, 2002 ( - American workers may be saving more than ever - and more than their parents ever dreamed of - but it may not be enough, according to new research.

In fact, despite a tripling of savings plans’ participation rates and dramatically accelerated vesting schedules, longer lifespans and burgeoning health care costs threaten to wipe out the savings that workers have managed to set aside.  Many employer-sponsored education programs emphasize only the replacement income aspects of retirement savings – and that only in the 70-80% range. 

However, retirees need to have $150,000 cash value set aside on the date of retirement just to replace the Medicare supplement, according to Dallas Salisbury, President and CEO of the Employee Benefit Research Institute (EBRI).

Defined Benefit Diminishment

While a noticeable number of today’s retirees still enjoy the coverage and cost of living (COLA) adjustments of pension and/or retiree health programs, that coverage is diminishing.  According to EBRI, in 2000, the $4.6 trillion accumulated in private pension assets could be found:

  • 45% – defined benefit programs
  • 37% – 401(k) programs
  • 18% – defined contribution programs other than 401(k)s

Still, while the prevalence of defined benefit pension plans continues to diminish, Salisbury noted the following trends for that market at the ABA Retirement Services Conference in Washington last week:

  • More cash balance plans – but with no lump sum option, as plan sponsors look to avoid one of the more controversial aspects of conversion to these programs from traditional pension offerings
  • More lump sum payments – from traditional pension plans, as early retirement programs continue to kick in
  • Fewer cost-of-living adjustments (COLA) in DB programs – even if inflation begins to rise, employers will be looking to cap their future liability
  • Larger DB plans – and an expanding premium base for the Pension Benefit Guaranty Corporation as M&A activity continues apace
  • Fewer small DB plans

On the 401(k) front, Salisbury suggests that there will be:

  • More 401(k) plans
  • More investment options in those 401(k) plans (from the 12 or so average at present)
  • More directed brokerage options – despite low utilization rates by participants overall

Advice-ory Opinion

Regarding investment advice, Salisbury referenced the recent SunAmerica advisory opinion from the Department of Labor (see DOL Lowers Another Advice Barrier), but noted that “for practical purposes, it changed nothing.’  Still, he noted that plans would likely continue to embrace a greater reliance on online participant control of their accounts.  He also suggested that the approach to negative elections implicit in the SunAmerica advisory was likely  to become more prevalent.

A potential concern for plan sponsors  – will the availability of investment advice lead to less investment education for participant investors?

Stock Shock?

Turning to company stock, Salisbury cautioned the audience that employer stock is an investment option in only a relatively small number of plans – and that less than 0.5% of all plans require an employer contribution to be invested in employer stock, according to 2000 data from EBRI/ICI. 

However, in those plans that offer company stock with an employer-directed match, EBRI found that 53% of the plan assets were invested in stock – a percentage that fell to 22% when the employee had discretion in how the employer contribution was invested.  Further, EBRI found that just 33% of plan assets remained in employer stock even when the match was initially made in stock – if the employee was given the option to transfer that initial contribution to other funds.

Despite those areas of concern, there are bright prospects for the future, according to Salisbury.  EBRI has estimated that if all employers adopt the catch-up provision contained in EGTRRA and if just half of the highly compensated employees (HCEs) eligible take advantage – and the rest only if they hit the $11,000 limit, an extra $4 billion in retirement savings could result this year alone.  Even if no employers adopt the catch-up, the expanded limits could add another $2 billion to the private pension system.