Employer, Employee Decisions Can Change Retirement Savings Picture

Simulations performed by the Government Accountability Office (GAO) show that households, on average, would save enough in their DC plans over their careers to generate monthly lifetime income at retirement, as measured by an annuity equivalent, of about $2,970 in 2015 dollars.

Households in the low-earnings group would accumulate DC plan savings equivalent to an average annuity of about $560 per month in retirement, while households in the high-earnings group would save enough to receive about 11 times more annuity income from DC plans than low-earning households, on average.

However, the GAO found many decisions, some within the control of workers and some within the control of plan sponsors, can have significant effects on projected balances of DC savings. Universal participation provides the largest overall gains in the GAO’s projections of household retirement annuities—an average increase of 19%. This scenario also produced the largest increase for low-earning households’ average retirement annuities. Average annuities increased 35% for this group compared to 16% for high-earners.

Reducing a source of leakage at job change—the cashing out of DC savings when an employee separates from an employer—preserves retirement savings and allows workers to accrue higher benefits in the long term. The GAO’s projections show that if plan sponsors could eliminate cash-outs and instead require or encourage participants to roll these funds into other DC accounts or IRAs increases average projected retirement annuities 16%. Eliminating cash-outs also results in a projected 79% of low-earning households having at least some DC savings at retirement. Plan sponsors cannot currently eliminate the availability for participants to take lump-sum distributions. The GAO also noted that whether to allow participants to take loans or hardship withdrawals, and under what terms, also affects savings.

Eliminating eligibility and vesting wait-periods increases households’ projected average retirement annuities nearly 10% overall and 15% for low-earning households. Further, this scenario increases by 6 percentage points the projected number of households in the low-earnings group with DC savings at retirement.

While some employers already automatically enroll employees, requiring all DC plans to do so increases households’ projected retirement annuities by 5% overall and nearly 10% for low-earning households.

The GAO also said whether and in what amount the employer makes matching or non-contingent contributions to employees’ accounts, and which investment options are available to plan participants and their associated fees also have an effect on retirement savings.

For employees, taking full advantage of an employer’s matching contribution also increased projected savings, particularly for low-earning households. This scenario increased households’ retirement annuities 13% overall and 31% for low-earning households.

Other key individual decisions and behaviors that may affect retirement savings include:

• Participation—whether an individual enrolls in a DC plan to which they have access and are eligible;
• Participant contributions—how much a participant contributes to the plan;
• Investment decisions—how the participant allocates contributions among the available investment options;
• Withdrawals/loans—whether a participant withdraws from his or her DC account pre-retirement;
• Rollover—whether, upon separation from a job, a participant transfers the DC account savings to an IRA, moves it to a new DC plan, leaves the money in the old DC plan, or takes the account savings as a cash distribution;
• Age at retirement—the age at which the participant retires, which determines how many years the participant can accumulate DC savings and how long the money has to last in retirement; and
• Spend down, or decumulation—once the participant retires or otherwise cashes out monies from the plan, the participant must decide the method or schedule of spending, which may include lump-sum payments, programmed withdrawals, annuities, or possibly some combination thereof.

The GAO conceded that while the changes in each scenario improve projected retirement security by increasing DC retirement savings and the number of households with DC savings, each can place potential burdens on households or employers to achieve that security. It made no recommendations in its report to the Senate Committee on Health, Education, Labor and Pensions.

The GAO’s report may be downloaded from here.