Speech
Helping Working Americans Achieve
A Financially Secure Retirement
How the 401(k) System Is Succeeding
Ayco Summer InnerCircle
Benefits and Compensation Conference
July 28, 2011
Saratoga Springs, New York
Paul Schott Stevens
President and CEO
Overview
• Why ICI? Role of Mutual Funds in Retirement
• Profile of the U.S. Retirement System
• Measures of 401(k) Success
• Features That Contribute to 401(k) Success
• Reaction of U.S. Households to the Financial Crisis
• Actions of 401(k) Plan Participants in the Financial
Crisis
HOW THE 401(k) SYSTEM IS SUCCEEDING 1 JULY 28, 2011
Why ICI? Role of Mutual Funds in Retirement
• Mutual funds comprise about half of the assets in
defined contribution (DC) plans and individual
retirement accounts (IRAs)
• Mutual funds are well-suited to retirement plans
• Fund sponsors help employers promote and develop
the 401(k) system
• ICI has a large and active research program on
retirement assets, plans, and participants
HOW THE 401(k) SYSTEM IS SUCCEEDING 2 JULY 28, 2011
$2.6 $2.3
$2.1 $2.6
DC Plans IRAs
Mutual funds Other investments
Mutual Fund Share of DC, IRA Assets
HOW THE 401(k) SYSTEM IS SUCCEEDING 3 JULY 28, 2011
Trillions of dollars, 2011:Q1
Source: See Investment Company Institute, “The U.S. Retirement Market, First Quarter 2011” (June 2011)
55% 47%
$4.7 $4.9
Mutual Funds Are Well-Suited to
Retirement Plans
• Strong regulatory system
Diversification, custody, prohibitions on affiliated
transactions, strict governance
• Transparency, daily pricing
• Fiduciary culture
• Comprehensive shareholder services
• Cost-effective investing
• Suitable for use in plans of all sizes
HOW THE 401(k) SYSTEM IS SUCCEEDING 4 JULY 28, 2011
Fund Sponsors Help Employers Promote and
Develop the 401(k) System
• Professional asset management, providing
diversification, innovation
Index funds, lifestyle funds, target date funds
• Recordkeeping, communications, and education
Daily balances available by phone or Internet
Educational materials
Website tools and online calculators
Income stream estimates on participant statements
• Research and advocacy
HOW THE 401(k) SYSTEM IS SUCCEEDING 5 JULY 28, 2011
ICI Has a Large, Active Research Program
• Retirement assets
Member, financial institution, plan sponsor data
• 401(k) asset allocation, balances, loan activity
EBRI/ICI 401(k) database
ICI Survey of DC Plan Recordkeepers
• 401(k) services, fees, and expenses
ICI annual “The Economics of Providing 401(k) Plans”
Deloitte/ICI DC plan “all-in” fee study
• The IRA Investor Database™
• Household surveys
HOW THE 401(k) SYSTEM IS SUCCEEDING 6 JULY 28, 2011
Profile of the U.S. Retirement System
• More than 82 million U.S. households have defined
benefit (DB) plans, DC plans, or IRAs
• Assets earmarked for retirement have grown as a
share of households’ financial assets
• DC plans and IRAs make up a growing share of
retirement assets
• Since ERISA, a higher percentage of retirees are
receiving private-sector retirement plan benefits, and
in real terms the benefits are higher
HOW THE 401(k) SYSTEM IS SUCCEEDING 7 JULY 28, 2011
70 Percent of U.S. Households Have
Employer Plans, IRAs, or Both
Own IRA only
Have IRA and
employer-
sponsored
retirement plan
Have employer-
sponsored
retirement plan only
Do not have IRA or
employer-
sponsored
retirement plan
HOW THE 401(k) SYSTEM IS SUCCEEDING 8 JULY 28, 2011
30%
8%
29%
Percentage of U.S. households, 2010
Sources: ICI Annual Mutual Shareholder Tracking Survey and U.S. Census Bureau; see Holden and Schrass, “The Role of IRAs in U.S.
Households’ Saving for Retirement, 2010,” ICI Fundamentals (December 2010)
33%
U.S. Retirement Assets Top $18 Trillion in
2011:Q1
1990 1995 2000 2002 2004 2006 2007 2008 2009 2010 2011:Q1
401(k) plans Other DC plans IRAs Other plans
$4.7 $4.9
$1.5 $1.5
$3.1
HOW THE 401(k) SYSTEM IS SUCCEEDING 9 JULY 28, 2011
Note: For definitions of plan categories, see Table 1 in “The U.S. Retirement Market, First Quarter 2011.” Components may not add to the total
because of rounding. Some data are estimated.
Source: See Investment Company Institute, “The U.S. Retirement Market, First Quarter 2011” (June 2011)
Trillions of dollars, end-of-period
39%
48%
53% $3.9
$7.0
$11.7
$10.5
$13.8
$16.7
$17.9
$13.9
$16.0
$17.6 $18.1
$3.2
Pensions (DB and DC) Make Up a Growing
Share of Retiree Income
1975 1985 1995 2005 2009
Social Security Public assistance Private pension
Gov't pension Asset income Other
HOW THE 401(k) SYSTEM IS SUCCEEDING 10 JULY 28, 2011
Source: ICI tabulations of the March Current Population Survey; see Brady and Bogdan, “A Look at Private-Sector Retirement Plan Income After
ERISA,” ICI Perspective (November 2010)
19%
26%
Percentage of total retiree income, on a per capita basis, selected years
4%
11%
8%
3%
54%
3%
12%
13%
13%
58%
19%
1%
Retirees Receive More Income from Private-
Sector Pensions (DB and DC)
$4,553
$3,909
$4,670
$5,842 $6,000
1975 1985 1995 2005 2009
HOW THE 401(k) SYSTEM IS SUCCEEDING 11 JULY 28, 2011
On a per capita basis, median, 2009 dollars, selected years
Source: ICI tabulations of the March Current Population Survey; see Brady and Bogdan, “A Look at Private-Sector Retirement Plan Income After
ERISA,” ICI Perspective (November 2010)
Share of retirees whose
only pension income is
private-sector
20.0% 25.7% 30.5% 31.2% 30.9%
Measures of 401(k) Success
• Retirement assets are growing, and DC plans and
IRAs account for an increasing share
• Participants have positive attitudes:
Appreciate features of plans
Express confidence in plans
• EBRI/ICI and academic research projections indicate
401(k) plans can generate significant retirement
income and wealth
HOW THE 401(k) SYSTEM IS SUCCEEDING 12 JULY 28, 2011
DC Savers Appreciate DC Account Features
92%
82%
96%
My employer-sponsored
retirement account helps me think
about the long term, not just my
current needs.
The immediate tax savings from
my retirement plan are a big
incentive to contribute.
It is important to have choice in
and control of the investments in
my retirement plan account.
HOW THE 401(k) SYSTEM IS SUCCEEDING 13 JULY 28, 2011
Percentage of DC-owning households agreeing with each statement, fall 2010
Note: Figure reports the percentage of DC-owning households who “strongly agreed” or “somewhat agreed” with the statement.
Source: ICI tabulation of GfK OmniTel survey data (November and December 2010); see Holden, Bass, and Reid, Commitment to Retirement
Security: Investor Attitudes and Actions (January 2011)
83%
90%
88%
17%
10%
12%
Households not owning DC accounts or IRAs
DC- or IRA-owning households
All households
Disagree Agree
Large Majorities of Americans Want to Keep
DC Plan Tax Features
HOW THE 401(k) SYSTEM IS SUCCEEDING 14 JULY 28, 2011
75%
87%
82%
25%
13%
18%
Households not owning DC accounts or IRAs
DC- or IRA-owning households
All households
Percentage of U.S. households agreeing or disagreeing, fall 2010
Source: ICI tabulation of GfK OmniTel survey data (November and December 2010); see Holden, Bass, and Reid, Commitment to Retirement
Security: Investor Attitudes and Actions (January 2011)
The government should take away the tax advantages of DC accounts
The government should reduce the amount that individuals can contribute
to DC accounts
Three-Quarters of U.S. Households Express
Confidence in DC Plans
Very confident
Somewhat confident
Not very confident
Not at all confident
HOW THE 401(k) SYSTEM IS SUCCEEDING 15 JULY 28, 2011
Percentage of U.S. households, fall 2010
Source: ICI tabulation of GfK OmniTel survey data (November and December 2010); see Holden, Bass, and Reid, Commitment to Retirement
Security: Investor Attitudes and Actions (January 2011)
DC accounts can help
individuals meet retirement
goals
24%
51%
16%
9%
EBRI/ICI Finds Full Careers with 401(k)s
Generate Significant Retirement Income
• The EBRI/ICI 401(k) Accumulation Projection Model moves
401(k) participants through their careers, with decisions as
they age that reflect actual participant behavior on
contributions, asset allocations, job changes, rollovers,
withdrawals, and loans
• Study focuses on 401(k) participants who will turn 65
between 2030 and 2039 (now aged 37 to 46)
• For more than 60 percent of this cohort, their 401(k)
accumulations are projected to replace more than half their
salaries
HOW THE 401(k) SYSTEM IS SUCCEEDING 16 JULY 28, 2011
Source: EBRI/ICI 401(k) Accumulation Projection Model; see Holden and VanDerhei, “The Influence of Automatic Enrollment, Catch-Up, and
IRA Contributions on 401(k) Accumulations at Retirement,” ICI Perspective and EBRI Issue Brief (July 2005)
Academic Research Finds Full Careers with
DC Plans Generate Significant Nest Eggs
“Our projections suggest that the advent of personal
account saving will increase wealth at retirement for
future retirees across the lifetime earnings spectrum.”
—James Poterba, MIT; Steven Venti, Dartmouth College;
and David Wise, Harvard University
HOW THE 401(k) SYSTEM IS SUCCEEDING 17 JULY 28, 2011
Source: See Poterba, Venti, and Wise, “The Changing Landscape of Pensions in the United States,” NBER Working Paper (September 2007)
Features That Contribute to 401(k) Success
• Plan sponsors and service providers highlight the
importance of retirement saving (education and tools)
• Employers play a fiduciary role
• Plans offer discipline—saving paycheck-by-paycheck
(payroll deduction; dollar-cost averaging)
• DC plan design is well-suited to a mobile workforce
(portability)
• Plans offer investment opportunities and flexibility
• Sponsors, providers innovate in plan design
HOW THE 401(k) SYSTEM IS SUCCEEDING 18 JULY 28, 2011
Growth of Automatic Enrollment Reflects
401(k) Innovation
5%
10%
15%
19% 21%
24%
2005 2006 2007 2008 2009 2010
HOW THE 401(k) SYSTEM IS SUCCEEDING 19 JULY 28, 2011
Source: The Vanguard Group; see How America Saves 2011
24%
16%
48%
45%
All <1,000 1,000 to
4,999
5,000+
2010 automatic enrollment by plan size
Percentage of plans
Number of participants
Innovation in Automatic Enrollment Design
Increases Contributions
HOW THE 401(k) SYSTEM IS SUCCEEDING 20 JULY 28, 2011
Source: The Vanguard Group; see How America Saves 2011
Contribution design among plans with automatic enrollment; percentage of plans
27%
15%
46%
58%
12% 10%
15% 17%
2005 2010
5 percent or more
4 percent
3 percent
1 or 2 percent
Initial default
contribution rate
31%
74%
1%
2005 2010
2 percentage points
1 percentage point
Default automatic
increase
Automatic Enrollment Turns
Nonparticipants into Savers
HOW THE 401(k) SYSTEM IS SUCCEEDING 21 JULY 28, 2011
Source: The Vanguard Group; see How America Saves 2011
Average contribution rates by plan design, percent of income, 2010
7.4%
6.3%
4.2%
5.2%
Voluntary
enrollment
Automatic
enrollment
Voluntary
enrollment
Automatic
enrollment
Participant contribution rates Employee contribution rates
Default Investment Options Increase Focus
on Growth and Diversification
30%
3%
10%
1%
17%
14%
37%
80%
6% 2%
2005 2009
Other
Target date fund, lifestyle fund, or managed account
Balanced fund
Money market fund
Stable value fund
HOW THE 401(k) SYSTEM IS SUCCEEDING 22 JULY 28, 2011
Default investment options among plans with automatic enrollment; percentage of plans
57% use
target date
funds
Note: “Fund” includes mutual funds, collective investment trusts, and other pooled investments.
Source: Profit Sharing/401k Council of America; see annual PSCA member surveys
Target Date Funds Claim a Growing Share of
401(k) Market
HOW THE 401(k) SYSTEM IS SUCCEEDING 23 JULY 28, 2011
57%
62%
19%
5%
67% 68%
25%
7%
75% 72%
31%
7%
77%
71%
33%
10%
Plans offering Participants offered Participants holding Target date fund assets
2006 2007 2008 2009
Percentage of total, 2006–2009
Note: “Funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investments product primarily
invested in the security indicated.
Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, and Alonso, “401(k) Plan Asset Allocation,
Account Balances, and Loan Activity in 2009,” ICI Perspective (November 2010)
Reaction of U.S. Households to the Financial
Crisis
• U.S. households express less willingness to take
financial risk and risk tolerance has declined across
many age groups
• Households in their thirties are less likely to hold
equities today compared with a decade ago
• A majority of households became more financially
conservative in the wake of the financial crisis
HOW THE 401(k) SYSTEM IS SUCCEEDING 24 JULY 28, 2011
U.S. Households Express Less Willingness
to Take Financial Risk
13% 14%
17%
23% 23%
19% 20% 19% 20%
17%
19%
24%
33% 32%
27% 28%
25% 25%
1989 1992 1995 1998 2001 2004 2007 2009 2010
All U.S. households
DC- or IRA-owning households
HOW THE 401(k) SYSTEM IS SUCCEEDING 25 JULY 28, 2011
Percentage of households willing to take above-average or substantial financial risk for
commensurate levels of financial gains
Sources: ICI tabulation of Federal Reserve Board Survey of Consumer Finances and ICI Annual Mutual Fund Shareholder
Tracking Survey; see Investment Company Institute, 2011 Investment Company Fact Book (May 2011)
0
5
10
15
20
25
30
35
25
30
35
40
45
50
55
60
65
70
75
80
85
Age at time of survey
Risk Tolerance Has Declined Across Many
Age Groups
26
Sources: ICI tabulations of Federal Reserve Board Survey of Consumer Finances and ICI Annual Mutual Fund Shareholder Tracking Surveys
Born 1970 to 1979
Born 1960 to 1969
Born 1950 to 1959
Born 1940 to 1949
Born 1930 to 1939
Born 1920 to 1929
Percentage of all U.S. households willing to take above-average or substantial financial
risk, 10-year birth cohorts, 1989–2010
JULY 28, 2011 HOW THE 401(k) SYSTEM IS SUCCEEDING
30-Somethings Today Are Less Likely to
Hold Equities Than 30-Somethings in 2000
26%
7%
12% 11% 12%
Stock fund inside
IRA or DC plan
Stock fund outside
IRA or DC plan
Individual stock Employer stock Hybrid fund inside
IRA or DC plan
HOW THE 401(k) SYSTEM IS SUCCEEDING 27 JULY 28, 2011
Source: ICI Annual Mutual Fund Shareholder Tracking Survey
Percentage of households, 2000 and 2010
2000 2010 2000 2010 2000 2010 2000 2010 2000 2010
Birth cohort
1960–1969
1970–1979
33%
16%
23%
30%
7%
Households Became More Financially
Conservative
Over the past three years, 58 percent
made one or more of these moves:
Increased regular saving;
Shifted investments away from
stocks (to be more conservative);
or
Delayed retirement or increased
retirement age.
HOW THE 401(k) SYSTEM IS SUCCEEDING 28 JULY 28, 2011
42% 58%
Sample of 2,039 households with IRAs,
DC accounts, or other financial assets
Source: ICI tabulation of GfK OmniTel survey data (November and December 2010); see Holden, Bass, and Reid, Commitment to
Retirement Security: Investor Attitudes and Actions (January 2011)
Actions of 401(k) Plan Participants in the
Financial Crisis
• Account balances tended to rise and fall with the stock
market, but participants were well-served by dollar-
cost averaging into equities
• Participants generally stayed the course
• Like other households, retirement savers express less
willingness to take financial risk, but 401(k) features
help savers maintain a balanced approach
HOW THE 401(k) SYSTEM IS SUCCEEDING 29 JULY 28, 2011
Contributions, Returns Helped Consistent
401(k) Participants Bounce Back in 2009
HOW THE 401(k) SYSTEM IS SUCCEEDING 30 JULY 28, 2011
$60,144
$72,173
$82,768
$99,644
$115,257
$83,161
$109,723
2003 2004 2005 2006 2007 2008 2009
Average account balance* among 401(k) participants who held accounts
from year-end 2003 through year-end 2009
*Account balances are participant account balances held in 401(k) plans at the participants’ current employers and are net of plan loans.
Retirement savings held in plans at previous employers or rolled over into IRAs are not included.
Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, and Alonso, “401(k) Plan Asset Allocation,
Account Balances, and Loan Activity in 2009,” ICI Perspective (November 2010)
-27.8% +31.9%
DC Plan Participants Stayed the Course
3.9%
1.3%
3.7%
14.4%
12.4%
3.1%
1.6%
3.4%
11.8%
10.5%
3.5%
1.7%
2.4%
10.3%
8.0%
Took any withdrawal Took hardship
withdrawal
Stopped contributing Changed asset
allocation of account
balance
Changed asset
allocation of
contributions
2008 2009 2010
HOW THE 401(k) SYSTEM IS SUCCEEDING 31 JULY 28, 2011
Summary of recordkeeper data; percentage of participants
Note: The samples include more than 22 million DC plan participants for 2008; nearly 24 million DC plan participants for 2009; and more than 23
million DC plan participants for 2010.
Source: ICI Survey of DC Plan Recordkeepers (January–December 2008; January–December 2009; and January–December 2010); see Holden,
Defined Contribution Plan Participants’ Activities, 2010 (May 2011)
401(k) Participants Have Tempered Their
Account Allocation to Stocks
15% 14% 11% 11% 11% 11%
20% 19%
14% 19% 14%
20% 15%
27%
13%
15% 55% 54% 59%
51% 55%
39% 40%
22%
2000 2009 2000 2009 2000 2009 2000 2009
>80%–100%
>60%–80%
>40%–60%
>20%–40%
1%–20%
Zero
HOW THE 401(k) SYSTEM IS SUCCEEDING 32 JULY 28, 2011
*Includes stocks held in funds.
Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, and Alonso, “401(k) Plan Asset
Allocation, Account Balances, and Loan Activity in 2009,” ICI Perspective (November 2010)
20s 40s 60s
Percentage of 401(k) plan participants by age, 2000 and 2009
Participant age
Percentage of 401(k)
account allocated to
equities*
30s
Recently Hired Participants in Their Thirties
Hold More Target Date and Balanced Assets
12% 20% 16% 14%
22% 17%
9%
6% 5% 5%
5% 5%
68% 56% 56% 55% 43% 41%
8% 17%
14% 17% 17% 25%
7% 8% 11% 9%
1998 2005 2006 2007 2008 2009
Fixed-income* Company stock Equity funds Balanced funds Target date funds Non–target date balanced funds
HOW THE 401(k) SYSTEM IS SUCCEEDING 33 JULY 28, 2011
401(k) plan average asset allocation among 401(k) participants with two or fewer years of tenure, percent of total
*Fixed-income investments include bond funds, guaranteed investment contracts (GICs) and other stable value funds, and money funds.
Note: “Funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investments product primarily
invested in the security indicated. Percentages are dollar-weighted averages.
Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, and Alonso, “401(k)
Plan Asset Allocation, Account Balances, and Loan Activity in 2009,” ICI Perspective (November 2010)
Recently hired participants in their 30s
34% 28%
20% 25%
Questions and Answers
Helping Working Americans Achieve
A Financially Secure Retirement
How the 401(k) System Is Succeeding
HOW THE 401(K) SYSTEM IS SUCCEEDING 34 JULY 28, 2011
References
Brady, Peter, and Michael Bogdan. 2010. “A Look at Private-Sector Retirement Plan Income
After ERISA,” ICI Perspective (November). www.ici.org/pdf/per16-02.pdf and
www.ici.org/pdf/per16-02_appendix.pdf
Holden, Sarah. 2011. Defined Contribution Plan Participants’ Activities, 2010. Washington,
DC: Investment Company Institute (May). www.ici.org/pdf/ppr_10_rec_survey-q4.pdf
Holden, Sarah, Steven Bass, and Brian Reid. 2011. Commitment to Retirement Security:
Investor Attitudes and Actions. Washington, DC: Investment Company Institute (January).
www.ici.org/pdf/ppr_11_com_ret.pdf
Holden, Sarah, Michael Hadley, and Shaun Lutz. 2011. “The Economics of Providing 401(k)
Plans: Services, Fees, and Expenses, 2010,” ICI Perspective (June).
www.ici.org/pdf/per17-04.pdf
Holden, Sarah, and Daniel Schrass. 2010. “The Role of IRAs in U.S. Households’ Saving
for Retirement, 2010,” ICI Fundamentals (December). www.ici.org/pdf/fm-v19n8.pdf
Holden, Sarah, and Jack VanDerhei. 2005. “The Influence of Automatic Enrollment, Catch-
Up, and IRA Contributions on 401(k) Accumulations at Retirement,” ICI Perspective and
EBRI Issue Brief (July). www.ici.org/pdf/per11-02.pdf
HOW THE 401(k) SYSTEM IS SUCCEEDING 35 JULY 28, 2011
References, Continued
Holden, Sarah, Jack VanDerhei, and Luis Alonso. 2010. “401(k) Plan Asset Allocation,
Account Balances, and Loan Activity in 2009,” ICI Perspective and EBRI Issue Brief
(November). www.ici.org/pdf/per16-03.pdf
Investment Company Institute. 2011. 2011 Investment Company Fact Book. Washington,
DC: Investment Company Institute (May). www.icifactbook.org
Investment Company Institute. 2011. The U.S. Retirement Market: First Quarter 2011.
Washington, DC: Investment Company Institute (June).
www.ici.org/pdf/ppr_11_retire_q3_10.pdf
Poterba, James, Steven Venti, and David A. Wise. 2007. “The Changing Landscape of
Pensions in the United States,” NBER Working Paper, No. 13381, Cambridge, MA:
National Bureau of Economic Research (September). www.nber.org/papers/w13381
Profit Sharing/401k Council of America. 2010. 53rd Annual Survey of Profit Sharing and
401(k) Plans Reflecting 2009 Plan Experience. Chicago, IL: Profit Sharing/401k Council of
America.
The Vanguard Group. 2011. How America Saves 2011: A Report on Vanguard 2010
Defined Contribution Plan Data. Valley Forge, PA: The Vanguard Group.
https://institutional.vanguard.com/iam/pdf/HAS11.pdf
HOW THE 401(k) SYSTEM IS SUCCEEDING 36 JULY 28, 2011