LEONARD E. BURMAN, Urban Institute
Email: LBURMAN@UI.URBAN.ORG
NORMA B. COE, Tilburg University
Email: N.Coe@uvt.nl
MICHAEL DWORSKY, Brookings Institution
Email: mdworsky@brookings.edu
WILLIAM G. GALE, Brookings Institution
Email: WGALE@BROOKINGS.EDU

A variety of public policies aim to influence workers' disposition of preretirement lump-sum distributions (LSDs) from pensions. We use the implementation of several policy changes as natural experiments to test for rational and behavioral motives for saving behavior. Using data from the HRS and the CPS in the 1980s and 1990s, we find that higher tax rates on cash-outs increase rollovers. Controlling for the overall effective tax rate, structuring the tax as a "penalty" or adding withholding taxes on cashouts significantly increases rollovers. Allowing employers to unilaterally cash out balances for departing employees who do not make their own choice significantly reduces the effects of higher tax rates but boosts the impact of withholding taxes. These results suggest that both behavioral and rational factors influence workers' choices, that policies relating to pre-retirement cash outs can interact in important ways, and that the government has several levers at its disposal to influence behavior beyond tax penalties.

JACK VANDERHEI, Temple University - Risk Management & Insurance & Actuarial Science, Employee Benefit Research Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM

During 2008, major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37.0 percent for the year, which translated into corresponding losses in 401(k) retirement plan assets. But how individual 401(k) participants are affected by the crisis is largely determined by their account balance, age, and job tenure. This paper estimates changes in average 401(k) balances from Jan. 1, 2008, to Jan. 20, 2009, using the EBRI/ICI 401(k) database of more than 21 million participants. Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant's account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent. This analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market declines. Because future performance is unknown, this analysis provides a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper presents results from the latest Survey of Income and Program Participation (SIPP) data on retirement plan participation. SIPP is conducted by the U.S. Census Bureau to examine Americans' participation in various government and private-sector programs that relate to their income and well-being. These latest data are from Topical Module 7 of the 2004 Panel fielded from January-April 2006. The SIPP data have the advantage of providing relatively detailed information on the retirement plans that workers participate in, but they also have the drawback of being fielded only once every three to five years. In comparison, the Census Bureau's Current Population Survey (CPS) provides overall participation levels of workers on an annual basis but does not provide information on the plan types in which the workers are participating.

This paper provides "top-line" results from the latest SIPP data on retirement plan participation. A later paper will provide more detailed breakdowns of these data. The overall participation by all workers and nonagricultural wage and salary workers is presented with breakdowns by workers' age and income. The next section investigates the plan type (defined benefit versus defined contribution) that retirement participants regard as their primary (most important) plan. The last section examines participation in and contributions to salary reduction plans (401(k)-type plans). The workers in this study include those from both the private and the public sectors.

CLIFTON B. MCFARLAND, Watson Wyatt Worldwide
Email: brendan.mcfarland@watsonwyatt.com
GAOBO PANG, Watson Wyatt Worldwide
Email: Gaobo.Pang@watsonwyatt.com
MARK J. WARSHAWSKY, Watson Wyatt Worldwide
Email: mark.warshawsky@watsonwyatt.com

This analysis empirically tests whether freezing or closing a defined benefit (DB) pension plan increases the sponsoring firm's market value. The database consists of 82 publicly traded U.S. firms that announced freezes/closes in 2003-2007. Based on this extensive sample and through a set of parametric and nonparametric tests under the event study methodology, the analysis finds generally negative or insignificant abnormal returns in stock prices that can be associated with the freeze/close events. There is little evidence to support the hypothesis that freezing or closing a DB plan increases firm value.

MICHAEL D. HURD, The RAND Corporation, SUNY at Stony Brook University, College of Arts and Science, Department of Economics, National Bureau of Economic Research (NBER)
Email: mhurd@RAND.ORG
SUSANN ROHWEDDER, The RAND Corporation
Email: Susannr@rand.org

The most common metric for assessing the adequacy of economic preparation for retirement is the income replacement rate, the ratio of income after retirement to income before retirement. However both economic theory and common sense say that someone is adequately prepared if she is able to maintain her level of economic well-being, which is not the same as maintaining her level of income or some fixed proportion of income. Economic well-being is typically measured by consumption, which is the measure we use. We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources, particularly wealth, which we compare with optimal consumption paths. We find that a substantial majority of those just past the usual retirement age are adequately prepared for retirement in that they will be able to finance a path of consumption that begins at their current level of consumption and then follows an age-pattern similar to that of current retirees. This is not true, however, for all groups in the population. In particular, almost half of singles who lack a high school education are likely to be forced to reduce consumption. Couples are much better prepared than singles. But because of taxes a substantial number of married college graduates will have to reduce consumption.

ROY P.M.M. HOEVENAARS, Maastricht University - Department of Quantitative Economics, APG Investments
Email: r.hoevenaars@ke.unimaas.nl
THEO P. KOCKEN, Cardano Risk Management
Email: tkocken@cardano-riskmanagement.nl
EDUARD PONDS, Tilburg University - Department of Economics, Netspar, APG (All Pensions Group)
Email: eduard.ponds@apg.nl

New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from Defined Benefit (DB) plans to a variety of collective and individual Defined Contributions (DC) plans. Most of these shifts have been ad-hoc and not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shift from a typical DB to a collective DC plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate at four percent of pay.

ALEXANDER M. GELBER, Harvard University, National Bureau of Economic Research
Email: gelber@gmail.com

This paper investigates the effect of 401(k) eligibility on saving. To address the possibility that eligibility correlates across individuals with their unobserved tastes for saving, I examine a change in eligibility: some individuals are initially ineligible for their 401(k) but become eligible when they have worked at their firm long enough. I find that eligibility raises 401(k) balances, but I find no evidence that other financial assets decrease. I also find no evidence that intertemporal substitution drives increases in saving following eligibility. In response to eligibility, IRA assets increase, consistent with a "crowd-in" hypothesis, and accumulation of cars decreases.

DEBRA A. DAVIS, John Marshall Law School
Email: debra_davis@cox.net

Understanding the fees charged to a plan is a critical component of a fiduciary's responsibilities and important information for participants to have. In order to help participants save for retirement, fiduciaries of 401(k) plans need to make sure that the plan is not paying more than reasonable fees for the services provided. In order to accomplish this duty, fiduciaries must understand the fees paid by the plan. However, the complexity of the manner in which fees are paid by retirement plans makes it challenging for this information to be communicated to fiduciaries and participants in a meaningful way.

This article addresses the types of information needed by fiduciaries of and participants in employer-sponsored 401(k) plans in order for plans to operate efficiently and effectively. The first part of this article discusses the unique structure of 401(k) plans and the roles of fiduciaries and participants in these types of plans. The second part discusses the responsibilities of fiduciaries and the information needed by fiduciaries to fulfill their duties. The third part analyzes the information needed by participants to obtain adequate retirement savings. The fourth part evaluates the guidance issued by the U.S. Department of Labor as of the date this article was written and suggests modifications to those disclosures.