® Employee Benefit Research Institute 2014® Employee Benefit Research Institute How Much Would it Take? Achieving Retirement Income Equivalency between Final-Average-Pay Defined Benefit Plan Accruals and Voluntary Enrollment 401(k) Plans in the Private Sector Jack VanDerhei Research Director Employee Benefit Research Institute THE Q-GROUP SPRING 2014 SEMINAR April 9, 2014

® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 Background Previous research Samwick and Skinner (2004) Poterba, Rauh, Venti and Wise (2007) EBRI 401(k) simulations ( ) Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final- Average-Pay Defined Benefit and Cash Balance Plans (June 2013 EBRI Issue Brief) Rationale Baseline assumptions Sensitivity analysis December 2013 EBRI Notes article Replace median defined benefit generosity with a procedure to determine the generosity parameter needed to produce equivalent retirement income 2

® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 Baseline Assumptions Historical rates of return Stochastic variables with log normal distribution and mean arithmetic real returns of 8.6 percent for equities, 2.6 percent for bonds Fees of 0.78 percent Wage growth 3.9 percent until 55 and 2.8 percent thereafter Participation probability = (1+unconditional probability)/2 once they have participated Unconditional probability before they have participated the first time Cashouts for 401(k) follow Vanguard 2012 experience Cashouts for defined benefit terminated vested based assumption that participants react similar to 401(k) participants based on LSD amount Annuity purchase price at 65 for males =

® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 Sensitivity Analysis 1.Reducing rates of return by 200 basis points. 2.Increasing annuity purchase prices to reflect low bond yields at the time. 3.1 and 2 simultaneously 4.Assuming real-wage growth does not drop to zero after age Assuming conditional-participation rates do not increase once an employee has participated in a 401(k) plan. 6.Assuming no cashouts at job change. 7.Changing defined benefit generosity parameter from median to 75 th percentile 4

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® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 Future Research Since the passage of the Pension Protection Act (PPA) in 2006, several EBRI studies have focused on the likely impact of automatic enrollment (AE) on 401(k) participants. While most industry data shows that the number of recently hired workers eligible for participation in an AE 401(k) plan has been increasing steadily since 2007, there are still a number of assumptions with respect to opt-out behavior for plans with automatic escalation of contributions that need to wait for additional empirical data before parameterization of the models can take place with increased precision. Therefore, despite the upward trend in AE adoption, voluntary enrollment (VE) 401(k) plans were the only type of 401(k) plan modeled in this analysis. Future research will repeat the analysis for AE plans as soon as there is sufficient time-series information and a corresponding analysis of median DB accrual rates required for equivalent retirement income will be undertaken. 22

® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 APPENDIX -- Cash balance plans 23

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® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201 References Poterba, James, Joshua Rauh, Steven Venti, and David A. Wise. “Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth.” Journal of Public Economics 91, no. 10 (November 2007): 2062–2086. Samwick, Andrew A., and Jonathan Skinner. “How Will 401(k) Pension Plans Affect Retirement Income?” The American Economic Review 94, no. 1 (March 2004): 329–