401(k) Participant Behavior in a Volatile Economy Prepared for the 14 th Annual RRC Conference, August 2, 2012 by Barbara Butrica and Karen Smith 1

Background DC pensions have become the dominant employer-provided pension type over the last several decades. Compared with DB pensions, DC pensions force workers to take charge of their retirement investments. Whether to participate How much to contribute What to invest in and how much 2

What happens to 401(k) contributions in a volatile economy? Three recessions Early 1990s (oil price shock) Early 2000s (collapse dot-com bubble, and 9/11) Late 2000s (stock market crash, housing collapse, and Great Recession) Volatility Stocks, housing, employment 3

Questions How do workers 401(k) contributions respond to economic downturns? Do they stop contributing to DC pensions? Do they change their contribution amounts? Do they change their asset allocation with fluctuations in the stock market? Do responses vary depending on the size of the downturn? 4

Data 1996, 2001, 2004, 2008 SIPP Large representative samples of US households Includes demographic, economic, and job characteristics Linked to Detailed Earnings Record (DER) Includes total earnings and worker contributions to DC plans Sample is person-year file of workers ages 20 to 69 from 1990 to ,381 person-year observations Over 168,000 individuals 5

Methods Examine participation of workers by year, age, income (DC contribution>0) All workers Workers offered a DC pension (SIPP pension year) Examine contribution amount among participants by year, age, income Examine asset allocation from SIPP self-reports Flows (among contributors) Assets (among account holders) Multivariate analysis of participation, contribution amounts, and stock allocation 6

Methods Particular variable of interest is YEAR Interested in variation around recessions and stock market crashes. 7

Participation 8

Participation rate among workers ages 20 to 69 increased dramatically over time.. 9

Participation rate declined slightly with the recent recessions.. 10 Drop in participation in 2001 and 2008 recessions

Participation rate increased for all workersparticularly those ages 30 to

They continued to rise through the recessions for workers ages 60 to

And fell sharply following both the 2001 and 2008 recessions for workers ages 20 to

The increase in participation rate seems to have plateaued below 50% for workers.. 14

The increase in participation rates seems to have plateaued below 50% for workers.. 15

The increase in participation rates seems to have plateaued below 50% for workers.. 16

Limitation of data Do not know if worker is offered a DC plan in the DER data. Do know DC offer at the SIPP pension interview. Limit the sample to include only workers offered a DC plan. 17

Given an DC offer, two-thirds of workers participate. 18

Over 40 percent of workers cant participate because they are not offered a DC plan. 19

Participation rate among workers offered a DC plan fell with the Great Recession at all ages.. 20

Contribution Amount Include only contributors ages 20 to

Median contribution amount among participants fell with the Great Recession. 22

Median contribution amount among participants fell with the Great Recession. 23

Median contribution amounts among participants fell with the Great Recession. 24

Median contributions continued to fall through 2010 for younger participants. 25

Median contributions continued to fall through 2010 for younger participants. 26

Median contributions increased in 2010 for older participants, but remain below 2007 amounts. 27

Changes in median DC contributions closely align with changes in GDP. 28

Changes in median DC contributions closely align with changes in GDP. 29

Multivariate Analysis Participation Logistic regression all workers Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year Logistic regression workers offered DC plan (duration of pension job at SIPP interview) Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year Marital status, change in marital status, spouse employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan. 30

Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year) 31

Probability of contributing to DC plan declined with the 2008 recession. (Unadjusted Beta for year) 32

Multivariate Analysis Contributions OLS regression all participants Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year OLS regression all participants from 1990-SIPP Control for age, earnings, number of work years since age 20, job change, job loss, SIPP panel, year Marital status, change in marital status, spouse employment status, spouse DC contributions, home ownership, number of dependents, having a baby, work limitations, health status, whether the employer contribute to the plan, can borrow from plan. 33

Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year) 34

Real DC contributions declined with the 2001 and 2008 recessions. (Unadjusted Beta for year) 35

What does this mean for retirement saving? Simple simulation Baseline uses observed median DC contributions for year-olds from 2007 to Assume 3 percent real growth on accumulations Assume workers increase annual real contributions by 1 percent each year after Alternate uses observed 2007 median DC contribution for year-olds. Assume 3 percent real growth on accumulations Assume workers increase annual real contributions by 1 percent each year after Only difference is the DC contributions for

For a typical 30-year-old, simulated retirement saving is 9.1 percent lower at age 62 because of the recession. 37

Account holders were less likely to invest in stocks after the 2008 economic melt-down but contribution allocations remained stable 38

Conclusions Less than half of workers participate in DC plans. 40 percent dont participate because their employers dont offer a plan. Median contributions are well below the statutory limit. Workers dont save adequately even in economic booms. They save less in recessions. 39

Conclusions Workers do lower DC participation and contributions during recessions. Lower contributions precede the recession. Lower participation lags behind the recession. The Great Recession will lower retirement saving for the typical 30-year-old today by about 9 percent. The impact is greater for higher-income workers and for workers farther from retirement. Some evidence that investors buy high and sell low locking in investment losses. Financial literacy could improve retirement saving 40