Funded Health and Pension Research Paper Abstracts
Health Paper Abstracts
Workplace Wellness Programs Study: Final Report
Soeren Mattke, Hangsheng Liu, John P. Caloyeras, Christina Y. Huang, Kristin R. Van Busum, Dmitry Khodyakov, and Victoria Shier, 2013 | Full Report
This report addresses Section 2705(m)(1) of the Public Health Service Act, which requires a survey of national worksite health policies and programs to assess employer-based health policies and programs and a report to Congress that includes recommendations for the implementation of effective employer-based health policies and programs. In this context, the overarching goal of this project is to assess the effectiveness and impact of workplace wellness programs and to identify best practices and lessons learned in program implementation to maximize their impact. A particular focus is studying the effect of employee incentives on program participation and results. The research under this project encompasses collection and analysis of data on the types of wellness programs offered by employers in the United States, employee incentives and their effectiveness and the impact on employee behavior, the affordability of coverage, and health outcomes.
Workplace Wellness Programs Study: Case Studies Summary Report
Soeren Mattke, Dmitry Khodyakov, Kristin Van Busum, Victoria Shier, and Christopher Schnyer, 2013 | Final Report
This report describes findings from four case studies of existing workplace wellness programs in a diverse set of employers. The authors describe characteristics of wellness programs, use of financial incentive and engagement strategies, facilitators and challenges to success, and impact of programs. Case studies were based on data collected through semi-structured interviews with organizational leaders, focus groups with employees, review of program materials, and direct observation.
2013 Self-Insured Report to Congress, Appendix B
Michael J. Brien and Constantijn W.A. Panis, 2013 | Full Report
The Patient Protection and Affordable Care Act of 2010 mandated that the Secretary of Labor prepare aggregate annual reports on self-insured group health plans based on Form 5500 Annual Return/Report of Employee Benefit Plan ("Form 5500") filings and financial filings of self-insured employers. Deloitte Financial Advisory Services LLP and its subcontractor Advanced Analytical Consulting Group, Inc. assisted the U.S. Department of Labor in its response to the law's requirement. This report updates the Self-Insured Health Benefit Plans ("2011 Report") and Self-Insured Health Benefit Plans 2012 ("2012 Report"). This report contains an analysis of such characteristics as plan type, number of participants, funding arrangements, and sponsors' financial health. The current report analyzes Form 5500 data through statistical year 2010. The method for classifying funding mechanism was refined relative to that in the 2011 and 2012 Reports, and the current report documents historical figures based on the refined method.
In 2010, 48% of plans filing a Form 5500 had a self-insured component (self-insured or mixed-funded). This fraction remained roughly unchanged from 2009 but represents a downward trend since 2001 when 56% of plans had a self-insured component. In contrast, the percentage of health plan participants covered by self-insured or mixed-funded plans increased from 75% in 2001 to 83% in 2010. The report also presents evidence that the prevalence of self-insurance generally increased with plan size. For example, 30% of plans with 100-199 participants were mixed-funded or self-insured in 2010, compared with 90% of plans with 5,000 or more participants. As seen in past years, multiemployer and multiple-employer plans were more likely to self-insure than single-employer plans. In 2010, 86% of multiemployer plans were self-insured or mixed-funded, compared with 58% of multiple-employer plans and 46% of single employer plans.
A Review of the U.S. Workplace Wellness Market
Soeren Mattke, Christopher Schnyer, and Kristin R. Van Busum, 2012 | Full Report
This report describes the state of workplace wellness programs and initiatives in the United States. It shows that wellness initiatives have become common to larger employers, offered by 92% percent of employers with 200 or more employees in 2009. Programs typically target health-related behaviors, like exercise and smoking, and risk factors, like obesity and high blood pressure. Existing evidence, albeit limited, suggests that programs can address those risks and reduce healthcare cost, but that a small proportion of employees typically participate in programs. Employers are increasingly using incentives, in some cases offered through the group health plan and in other cases not. Incentives may include cash prizes to employees and discounted health plan premiums to promote engagement. Little is known about the effect of such incentives and possible unintended consequences, such as cost shifting to employees in poor health. Future research is needed to assess the impact of wellness programs on behavior, health outcomes and cost-savings, the effects of incentives, and best practices for program execution.
2012 Self-Insured Report to Congress, Appendix B
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Report
The Patient Protection and Affordable Care Act of 2010 mandated that the Secretary of Labor prepare aggregate annual reports on self-insured group health plans based on Form 5500 Annual Return/Report of Employee Benefit Plan ("Form 5500") filings and financial filings of self-insured employers. Deloitte Financial Advisory Services LLP and its subcontractor Advanced Analytical Consulting Group, Inc. assisted the U.S. Department of Labor in its response to the law's requirement. This is the second report provided under this mandate. Unlike last year's analysis, this report uses a statistical year definition of Form 5500 data from 2001 to 2009. The statistical year grouping consists of all Form 5500 employee health benefit plan fillings with a plan year ending date in a given year.
In 2009, 42% of plans filing a Form 5500 had a self-insured component (self-insured or mixed-funded). This represents a slight decline from 2008 and continues a downward trend since 2001 when 45% of plans had a self-insured component. In contrast, the percentage of health plan participants covered by self-insured or mixed-funded plans increased from 64% in 2001 to 71% in 2008 and to 73% in 2009. The report also presents evidence that the prevalence of self-insurance generally increased with plan size. For example, 26% of plans with 100-199 participants were mixed-funded or self-insured in 2009, compared with 79% of plans with 5,000 or more participants. Self-insurance rates varied by industry, with agriculture, mining, construction, and utilities firms having the highest prevalence of self-insurance.
An Analysis of 2007-2009 Filings of Form M-1, Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs)
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
This report analyzes 2007-2009 filings of Form M-1, "Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs)" ("Form M-1"). MEWAs provide health or other welfare benefits to employees of two or more employers that are not part of a collective bargaining agreement, whereas ECEs are based on collective bargaining agreements. Form M-1 filings are submitted by MEWAs/ECEs that provide health benefits, possibly along with other welfare benefits. This report provides an overview of the purpose and contents of Form M-1, including a brief description of proposed Form M-1 changes, a description of the raw Form M-1 filings data, and, finally, summary statistics and tabulations of key data fields (variables).
Anomalies in Form 5500 Filings: Lessons from Supplemental Data for Group Health Plan Funding
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
The Form 5500 Annual Return/Report of Employee Benefit Plan ("Form 5500") is an important source of information on employer provided group health plans. The information provided on the Form 5500 to infer group health plans' funding mechanism, however, does not always allow unambiguous funding mechanism categorization, in part because of the design of the Form 5500 and in part because of incomplete or internally inconsistent filings. Seeking clarification on such ambiguities, U.S. Department of Labor contacted a subset of Form 5500 health plan filers. This report documents an analysis of those supplemental data and includes a comparison to original Form 5500 filings. We find, for example, that many of the anomalies appear to be due to oversights or errors by the Form 5500 filer. Based on our analysis, we also suggest improvements to the algorithm that attempts to derive funding mechanism from Form 5500 filings.
Strengths and Limitations of Form 5500 Filings for Determining the Funding Mechanism of Employer Provided Group Health Plans
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
This report presents an in-depth analysis of the interpretation and internal consistency of data underlying an annual report of the Secretary of Labor. The Patient Protection and Affordable Care Act of 2010 mandates that the Secretary prepare an annual report on self-insured group health plans based on Form 5500 Annual Return/Report of Employee Benefit Plan ("Form 5500") filings and other sources. Deloitte Financial Advisory Services LLP and its subcontractor Advanced Analytical Consulting Group, Inc. assisted the U.S. Department of Labor with this mandate and wrote Self-Insured Health Benefit Plans ("2011 Report"). The Secretary of Labor submitted to Congress the first such annual report in March 2011, which included the 2011 Report as its Appendix B.
The current report describes the contents of the Form 5500 and its Schedules, and it details the Form 5500 health plan filings funding mechanism classification as used in the 2011 Report. This report then documents funding mechanism determination limitations resulting from the Form 5500's design or its inconsistent responses, and it presents the sensitivity of funding mechanism classification to alternative Form 5500 limitation-resolving assumptions.
Identifying Self-Insured Health Plans Using Regulatory Data Sources
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
This report identifies potential data sources from federal and state regulatory filing requirements for group health plan sponsors. In particular, this report highlights filing requirements that could be used as sources for the analysis of self-insured group health plans. We identify Federal government reporting requirements across multiple agencies and formats including annual tax filings, informational statements to employees, and self-reporting on health plan operations and financials. A review of each of the 50 states' state level group health plan reporting requirements revealed six states with potentially relevant requirements.
Identifying Self-Insured Health Plans Using Research Data Sources
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
This report identifies and describes research data sources which hold potential to examine characteristics of group health plans, including whether the plans are fully insured, self-insured, or some combination thereof. Several data sources from the public and private sectors with information on group health plans were identified. Where available for each data source, this report provides an overview of the data, the unit of observation, the definition of funding mechanism, published sample statistics, questions/questionnaires used during data collection, sampling frame and sampling method, timing and frequency of data collection, availability of microdata, and feasibility of augmenting future data collection efforts.
Self-Insured Health Benefit Plans Second Report
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
The Affordable Care Act (§1253) mandated that the Secretary of Labor prepare aggregate annual reports with general information on self-insured group health plans (including plan type, number of participants, benefits offered, funding arrangements, and benefit arrangements), as well as data from the financial filings of self-insured employers (including information on assets, liabilities, contributions, investments, and expenses). The Secretary of Labor submitted to the designated committees of Congress the first such annual report in March 2011.
The current report expands and elaborates upon the report required to be prepared by the Secretary of Labor pursuant to ACA §1253. Both the March 2011 report and the current report contain an analysis of such characteristics as plan type, number of participants, costs, funding arrangements, and financial health, based on plans' annual Form 5500 filings and financial data on sponsoring firms. The reports also contain a review of the academic literature on self-insured plans and discussions with subject matter specialists. Finally, both reports discuss Form 5500 data-quality issues, with more details in the current report. Throughout, the current report provides additional tables and details that were not in the March 2011 report.
Self-Insured Health Benefit Plans Supplemental Report 2012
Michael J. Brien and Constantijn W.A. Panis, 2012 | Full Text
The Patient Protection and Affordable Care Act of 2010 mandated that the Secretary of Labor prepare aggregate annual reports on self-insured group health plans based on Form 5500 Annual Return/Report of Employee Benefit Plan ("Form 5500") filings and financial filings of self-insured employers. In 2012, the Secretary of Labor submitted Report to Congress: Annual Report on Self-Insured Group Health Plans. This report included an Appendix B compiled by Deloitte Financial Advisory Services LLP and Advanced Analytical Consulting Group, Inc., Self-Insured Health Benefit Plans 2012.
The current report expands and elaborates upon our 2012 Report. As required by §1253 of the ACA, the primary data source is the information provided by health plan sponsors on Form 5500 filings. For a subset of health plan sponsors, corporate financial data were also used. Both the 2012 Report and the current report contain an analysis of such characteristics as plan type, number of participants, funding arrangements, and sponsors' financial health, based on health plans' annual Form 5500 filings and financial data on health plan sponsors. Both reports also discuss new Form 5500 features and data-quality issues. Throughout, the current report provides additional tables and details that were not in the 2012 Report.
Self-Insured Health Benefit Plans
Michael J. Brien and Constantijn W.A. Panis, 2011 | Full Text
Section 1253 of the Patient Protection and Affordable Care Act requires a report on self-insured group health plans. Deloitte Financial Advisory Services LLP and its subcontractor Advanced Analytical Consulting Group, Inc. were engaged by the U.S. Department of Labor in its response to the law's requirement to analyze such characteristics as plan type, number of participants, costs, funding mechanisms, and financial health, based on plans' annual Form 5500 filings and financial data on sponsoring firms.
The report finds that almost 43% of plans filing a Form 5500 in 2008 had a self-insured component. The prevalence of self-insurance generally increased with plan size, so that over 72% of participants in plans filing a Form 5500 had a self-insured component. Multiemployer and multiple-employer plans were more likely to self-insure than single-employer plans, and firms in the agriculture, mining, construction, and utilities industries had the highest prevalence of self-insurance. The report also reviews the academic literature on self-insured plans. Finally, based on an analysis of the data and discussions with subject matter specialists it discusses Form 5500 data quality issues.
Large Group Health Plans Study
Michael J. Brien and Constantijn W.A. Panis, 2011 | Full Text
Section 1254 of the Patient Protection and Affordable Care Act requires the Secretary of Health and Human Services to conduct a study of the fully-insured and self-insured group health plan markets. The U.S. Department of Labor engaged Deloitte Financial Advisory Services LLP and its subcontractor Advanced Analytical Consulting Group, Inc. to assist the Secretary of Health and Human Services in her response to the law's requirement to compare employers that fully-insure their health plans through an external insurer and those that self-insure.
The report documents that 39% of plans with 100+ participants in 2008 had a self-insured component. The prevalence of self-insurance generally increased with plan size, so that the majority of participants (72%) were in plans that had a self-insured component. Multiemployer and multiple-employer plans were more likely to self-insure than single-employer plans, and firms in the agriculture, mining, construction, and utilities industries had the highest prevalence of self-insurance. The results were robust to joint controls for multiple factors in an econometric analysis of the selection of funding mechanisms. That analysis also demonstrated that firms in the bottom quartile of several financial performance metrics were more likely to fully-insure their health benefit plans than firms with better financial performance.
Employer Self-Insurance Decisions and the Implications of the Patient Protection and Affordable Care Act as Modified by the Health Care and Education Reconciliation Act of 2010 (ACA)
Christine Eibner, Federico Girosi, Amalia R. Miller, Amado Cordova, Elizabeth A. McGlynn, Nicholas M. Pace, Carter C. Price, Raffaele Vardavas, and Carole Roan Gresenz, 2011 | Full Text
The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (ACA) changes the regulatory environment within which health insurance policies on the small-group market are bought and sold. New regulations include rate bands that limit premium price variation, risk-adjustment policies that will transfer funds from low-actuarial-risk to high-actuarial-risk plans, and requirements that plans include "essential health benefits." While the new regulations will be applied to all non-grandfathered fully insured policies purchased by businesses with 100 or fewer workers, self-insured plans are exempt from these regulations. As a result, some firms may have a stronger incentive to offer self-insured plans after the ACA takes full effect. In this report we identify factors that influence employers' decisions to self-insure, and estimate how the ACA will influence self-insurance rates. We also consider the implications of higher self-insurance rates for adverse selection in the non-self-insured small-group market, and whether enrollees in self-insured plans receive different benefits than enrollees in fully-insured plans. Results are based on data analysis, literature review, findings from discussions with stakeholders, and microsimulation analysis using the COMPARE model. Overall, we find little evidence that self-insured plans differ systematically from fully insured plans in terms of benefit generosity, price, or claims denial rates. Stakeholders expressed significant concern about adverse selection in the health insurance exchanges due to regulatory exemptions for self-insured plans. However, our microsimulation analysis predicts a sizable increase in self-insurance only if comprehensive stop-loss policies become widely available after the ACA takes full effect, and the expected cost of self-insuring with stop-loss is comparable to the cost of being fully insured in a market without rating regulations.
Other Post-Employment Benefits: Overview
Michael J. Brien, Philip J. Cross, Thomas A. Dunn, and Constantijn W.A. Panis, 2009 | Full Text
Many firms provide benefits to retired workers outside of pensions. Assets and obligations for Other Post-Employment Benefits ("OPEB") reported on financial statements may include post-retirement medical, pharmacy, dental, vision, life, long-term disability and long-term care benefits. This study by Deloitte Financial Advisory Services LLP ("Deloitte FAS") and Advanced Analytic Consulting Group Inc. ("AACG") reviews OPEB obligations and provides an in-depth look at OPEB funding status for publicly-traded US firms. The authors use firm level data with self-reported OPEB assets and liabilities. In 2008 almost 1,000 publicly-traded firms reported OPEB obligations totaling just under $300 billion. Only 20 percent of those liabilities were backed by reserved assets. Deloitte FAS and AACG find that long term growth in OPEB obligations has recently reversed. The S&P 500 companies account for the majority of obligations in population of companies with 2008 OPEB obligations. Historically, assets and obligations have generally moved together.
Most companies that are underfunded have a deficit greater than 80% of their obligations. In recent years, small companies have proportionately larger OPEB funding deficits than large companies. Measured by revenue, small companies face roughly the same level of obligations as larger companies. Equity assets and fixed income make up the vast majority of OPEB assets. Participant contributions are a relatively small, but growing part of OPEB funding.
Hospital Ownership Changes and Employers Decision to Offer Insurance
Eric E. Seiber, 2006 | Full Text
This study uses 1995 - 1999 Contingent Workers Supplement and hospital ownership data from the American Hospital Associations Annual Surveys to how the employer sponsored insurance market responds to changes in hospital ownership. A Nested Multinomial Logit model estimates a two dimensional choice set of availability of an employer based plan and participation in that plan. The model indicates that access to a public hospital system produces a negligible effect on insurance availability and participation for all but the lowest income workers, and the data showed no appreciable difference for not-for-profit and for-profit hospitals.
The Dynamics of Health Insurance Coverage: Factors Correlated with Insurance Gain and Loss among Adults
Robert W. Fairlie and Rebecca A. London, 2005 | Full Text
In this study, we examine annual transitions into and out of health insurance coverage using matched data from the 1996 to 2004 Annual Demographic Files (ADF) of the Current Population Survey (CPS). Although the CPS ADFs have primarily been used as cross-sectional samples, we create a two-year panel by linking consecutive surveys. The large sample sizes and longitudinally matched CPS data allow us to explore the relationship between changes in detailed employment characteristics and health insurance transitions over a two-year period. To our knowledge, the matched CPS data have not been previously used to explore the dynamics of health insurance coverage. The CPS measures health insurance coverage over the entire year prior to the survey, capturing movement between year-long uninsurance and part- or full-year insurance over a two-year period. Our study therefore focuses on transitions between relatively long spells of uninsurance (at least one year) and any length spell of coverage. This allows us to focus specifically on intermittent insurance coverage that leads to longer spells of uninsurance, spells that are the most likely to result in adverse health or financial outcomes.
We address several research questions using the two-year CPS panel. First, we examine differences in the incidence of health insurance transitions across detailed demographic and employment characteristics. The focus is on identifying whether low rates of health insurance among certain groups, such as minorities, less-educated workers, part-time workers, and workers at small employers, are due to high rates of health insurance loss, low rates of obtaining health insurance, or both. Second, we examine the incidence of health insurance transitions between public and private coverage, and between each of these and uninsurance. Third, we examine whether dynamic factors, such as job loss, movement from full-time to part-time work, movement from a large employer to a small employer and other changes in job characteristics are associated with health insurance loss. We also explore whether changes in employment and job characteristics are associated with gaining health insurance. We then examine dynamic factors that are related specifically to the loss and gain of private health insurance. Although it is difficult to identify causal factors of health insurance transitions, the analysis of the relationship between changes in health insurance coverage and changes in potentially correlated factors using the large two-year panel data in the CPS improves on cross-sectional analyses and offers some of the first estimates of the relationship between changes in employment characteristics on dynamic health insurance outcomes.
Sinking with the Ship: How Does Involuntary Job Displacement Affect Health Insurance?
Kosali Ilayperuma Simon, 2005 | Full Text
Numerous job cuts during the 2001 recession and the subsequent sluggish recovery have no doubt added to the growing number of Americans without health insurance, yet little evidence exists on how involuntary job displacement is causally related to health insurance status. Prior research indicates that workers who are about to be displaced earn less than their non displaced counterparts, and that wage losses associated with displacement actually start prior to the date of separation. In this paper, I use panel and cross sectional data to test whether workers about to be displaced differ in their health insurance coverage from their employer relative to similar workers who are not displaced, and if so, how far back in time these health insurance losses occur. I also test the extent to which other sources of health insurance cushion the effects of displacement on health insurance. I find that workers who are subsequently displaced from jobs are less likely to have own-employer provided health insurance than otherwise similar workers who are not displaced, and that this difference starts up to two years prior to displacement. Other sources of health insurance play an important role in protecting the health insurance coverage of these workers, even in the pre-displacement period.
Post-displacement Health Insurance Coverage of Displaced Workers
Kosali Ilayperuma Simon, 2005 | Full Text
Workers who experience job displacement are especially vulnerable to uninsurance in a job-based health insurance system. Studies of the wage experience of these workers show persistent losses that continue well into the new job. The wage literature also highlights the role of spousal labor supply and the unemployment insurance system in protecting these workers. In this paper, I first test whether displaced workers are permanently scarred by job loss in terms of their health insurance coverage. In so doing, I also investigate the effect of alternative sources of health insurance in protecting displaced workers against uninsurance once re-employed. I next investigate the extent to which spousal health insurance acts as a subsidy during the job search process.
Once re-employed, former displaced workers fare worse than other new workers who voluntarily left jobs in terms of finding own-employer health insurance on the new job, although all workers experience some gains in health insurance with time on the new job. The relative loss of health insurance for displaced workers after re-employment is correlated with demographic factors (such as gender and marital status) and job characteristics (such as hours worked). In terms of the job search process, I find evidence that workers with access to spousal health insurance have longer job search periods after displacement, but do not necessarily find better paying jobs.
Household Demand for Health Insurance Price and Spouse's Coverage
Marjorie Honig, 2004 | Full Text
Demand for employment-based health insurance has traditionally been treated as an individual rather than a household decision. Dual-earner households are now the typical U.S. married household, however, and most firms offer family coverage as one of the options available to employees. Findings from a model that jointly estimates married workers take-up of their own employer-based insurance with both their own and their spouses insurance offers indicate that both own insurance price and opportunities for coverage under spouses employer-based plans are statistically important determinants of insurance take-up in dual-earner households.
Relative take-up elasticities with respect to own price and spouses offer indicate that potential coverage by spouses plays the larger role for both husbands and wives in the decision of whether to take their own coverage. We find evidence of selection into jobs offering health insurance among wives in dual-earner households, but not among husbands. Our findings also suggest that dual-earners may not be aware of the potential trade-off between wages and health benefits. Data are taken from the 1996 panel of the Survey of Income and Program Participation.
Pension Paper Abstracts
Revenue and Benefit Effects of Reducing DC Pension Salary-Reduction Caps
Martin Holmer, 2013 | Full Text
This report contains estimates of the impact of lowering maximum allowable pretax contributions to salary-reduction defined-contribution pension plans beginning in 2012. Several reforms are considered, including lowering the base contribution cap, eliminating the catchup cap, combining those two reforms, and replacing the current caps with a 20/20 cap. For each reform, estimates of the aggregate dollar decline in DC plan contributions by employees and employers are presented. In addition, an estimate of the rise in federal individual income tax revenue during the first year of the reform is provided. And finally, the retirement income effects of each reform are estimated using a cohort sample of individuals who experience the reform over their whole work career.
Designing Better Pension Benefits Statements - Current Status, Best Practices and Insights from the Field of Judgment and Decisionmaking
Lauren A. Fleishman-Mayer, Angela Hung, Joanne Yoong, Jack Clift and Caroline Tassot, 2013 | Full Text
Decisionmaking on saving for retirement requires individuals to have knowledge on fundamental issues, such as the functioning of pension systems, portfolio allocation, future expected benefits, contribution histories and risks. Currently, the information provided in pension benefits statements vary widely by plan provider as well as by the nature of benefits offered. The inconsistency could occur partly because recommended best practices for, and empirical studies that test, the design and content of statements vary widely in the literature. Furthermore, little is known on how people think about saving for retirement. Insights from the fields of behavioral economics, and judgment and decisionmaking can fill some of these literature gaps by applying psychological theories to help better inform consumers about their financial decisions and retirement status using benefits statements. In this paper, we provide a normative and positive review of pension benefit statement design. We begin by reviewing best practices and recommendations provided from the trade literature. Next, we describe the content and design of a cross section of statements that are currently being used by plan providers. Finally, we review the academic literature on individuals' understanding of, and information needs related to, pension benefits statements. The latter includes a description of the few studies explicitly researching pension statement design related questions, general behavioral and decisionmaking literature that can be applied to the content and presentation of information, and general literature on whether and to what extent uncertainty should be presented.
Retirement Income Effects of Changing the Income Tax Treatment of DC Pension Plans
Martin Holmer, 2012 | Full Text
This paper presents estimates of the after-tax retirement income effects of switching, over a whole lifetime, the federal income tax treatment of defined contribution (DC) pension plan contributions and withdrawals from the traditional tax-exempt and taxable to an alternative treatment in which all DC contributions would be taxable and all DC withdrawals would be tax-exempt. The estimates are produced using a microsimulation model of lifetime pension accumulation that contains a federal income tax calculator and a social security benefit calculator. Two sets of estimates are presented: one in which income tax thresholds are assumed to be indexed to wages and another in which thresholds are indexed to prices as under current law. The estimates suggest that the average effect on after-tax retirement income of this switch in the federal income tax treatment of DC contributions and withdrawals would be less than a one percent decrease when tax thresholds are indexed to wages and slightly more than a two percent increase under current-law price indexing. The magnitude of the changes rise with lifetime earnings and there is considerable variation around the average effect especially when tax thresholds are indexed to prices.
Annuities in the Context of Defined Contribution Plans
Michael J. Brien and Constantijn W.A. Panis, 2011 | Full Text
This report sheds light on the market for annuities and the demand for annuities by defined contribution (“DC”) plan participants. An annuity is a financial product that promises a periodic payment, typically over the course of the annuitant’s life, in exchange for a up-front premium. The individual market for annuities has become increasingly important as employers shift from defined benefit pension plans to 401(k) or other defined contribution plans. The report first provides an overview of the market for annuities in the United States. Annuity prices have generally risen over the past 25 years (or, equivalently, the monthly benefit per $1,000 premium has fallen), while the spread in prices across insurance companies has narrowed since 2003. The report then turns to the extent to which annuities are available to DC plan participants. Roughly 1% of DC plans offer a deferred annuity among their investment options. Separately, about 6% of plan participants annuitized some or all of their plan balances upon retirement; the option to do so appears to have become less widespread over the past decade. Finally, plan participants may roll over the balance into an IRA and purchase an annuity with IRA assets.
Target Date Funds and Retirement Savings
Michael J. Brien, Philip J. Cross, Thomas A. Dunn, Constantijn W.A. Panis, and Joice A. Pharris, 2010 | Full Text
Deloitte Financial Advisory Services LLP ("Deloitte FAS") and Advanced Analytic Consulting Group Inc. ("AACG") explore how Target Date Funds (TDFs) can affect the accumulation of retirement wealth by using the micro-simulation model PENSIM to examine the distribution of Defined Contribution (DC) benefits accumulated by investors under various asset allocation strategies. The PENSIM model, together with the companion SSASIM model, consist of numerous equations that predict individual outcomes, such as job changes, pension plan availability, and DC contributions under random macroeconomic scenarios. Deloitte FAS and AACG study the differences in the distributions of pension wealth accumulation across many macroeconomic scenarios for a random selection of approximately 30,000 individuals in the 1995 birth cohort.
The authors find that the TDFs specified in the study outperformed debt-only investment styles in about 70 percent of the macro scenarios. The all-equity investor styles in the study outperformed the TDFs 60 to 80 percent of the time. It is important to note that these conclusions are based on projected differences in DC pension benefit accumulations generated under a specific set of macro scenarios; a different set could produce different results. Additionally, these results could be sensitive to the premium on equity returns over debt built into the model, which is assumed to be 2.0%.
The authors also investigate the insurance properties of TDFs by selecting scenarios with poor equity returns just prior to retirement. For these scenarios, the conservative TDF outperforms most equity investment styles and fares better than the aggressive TDF. The authors suggest that the value of TDFs may be heightened when poor equity returns occur just prior to retirement.
Volatility Metrics for Mutual Funds
Michael J. Brien, Constantijn W.A. Panis, and Karthik Padmanabhan, 2010 | Full Text
It is possible that inexperienced 401(k) participants may be over-influenced by recent historical returns, and do not properly factor return volatility into their allocation decisions. This report from Deloitte Financial Advisory Services LLP ("Deloitte FAS") and Advanced Analytic Consulting Group Inc. ("AACG") explores the extent to which a number of commonly used volatility metrics convey consistent information by comparing the metrics across a set of funds. The authors distinguish between absolute and relative volatility metrics and conclude that relative metrics can be misleading to investors who lack sufficient understanding of the comparison that is implicit in relative metrics.
The study examines six commonly-used absolute volatility metrics, some of which may be more intuitive and easier to understand than others. The value of each of the six absolute volatility metrics is calculated for a selection of funds and individual company stocks. Deloitte FAS and AACG conclude that the volatility rank order of funds is similar for most, but not all, absolute risk metrics, so that 401(k) participants may benefit as much from an intuitive, easy-to-understand metric as from more complex metrics.
In particular, the report shows that a casual investor is likely to draw similar conclusions about the volatility rank order of funds in his investment menu whether he uses the best/worst historical return, the standard deviation of daily returns, the standard deviation of monthly returns, the number of trading days with price changes in excess of 1 percent, or the Financial Engines Fund Risk metric. Given the absence of clear superiority of any single metric, relatively minor advantages and disadvantages may draw distinctions among them. For example, the number of trading days with price changes in excess of 1 percent might be preferred because it is intuitive and easy to understand. Of the six absolute volatility metrics studied, the five metrics mentioned above appear to hold merit for educating 401(k) participants about the volatility rank order of their fund options.
Target Date Funds: Historical Volatility/Return Profiles
Michael J. Brien, Philip J. Cross, and Constantijn W.A. Panis, 2009 | Full Text
This study by Deloitte Financial Advisory Services LLP ("Deloitte FAS") and Advanced Analytic Consulting Group Inc. ("AACG") explores the returns and volatility of families of target date funds (TDFs), especially the performance of target-2010 funds during the recent economic crisis. The study makes use of data on 1,645 funds ranging in size from less than $1 million to $16.8 billion in assets. Over the period 2005-2009, TDF returns generally increase with equity exposure, except in 2008, when these funds performed particularly poorly. The findings suggest that rates of return and volatility on target-2010 funds varied substantially in 2008. The spread in returns can be traced to substantial variation in equity exposure. In fact, some fund families maintain equity exposure of more than 60 percent, even for their 2010 fund. Small 2010 funds as a whole exhibited more heterogeneous volatility than large 2010 funds.
The authors select seven families of target date funds for an in-depth look at their returns, volatility, and equity exposure. From these seven families, the best performing 2010 funds in 2008 were not "typical" TDFs. One invests only in Treasury securities, while another does not have 2020, 2030, 2040, 2050 sibling funds. Deloitte FAS and AACG further find that the overall objective of funds, as stated in fund prospectuses, is generally not informative of whether a fund is aggressive or conservative.
Generally Accepted Investment Theories
Constantijn Panis and Joshua B. Schaeffer, 2007 | Full Text
This document summarizes influential investment theories in modern finance literature. The authors start with a description of the foundations laid by Markowitz (1952) and a widely cited application, the Capital Asset Pricing Model (CAPM). The report next turns to several extensions of Markowitz (1952) and CAPM which by now have become widely used among finance scholars and practitioners. In particular, recognizing that the objectives of investors and their exposure to various risks may change over time, the authors discuss extensions which form the basis of dynamic portfolio allocation and reallocation over the life cycle.
Participation in Defined Contribution Plans
William E. Even and David Macpherson, 2005 | Full Text
During the 1990s, many pension plans shifted the responsibility for directing the investment of pension plan assets to the employee. This study examines the rapid growth of the participant directed pension plans using data from the Survey of Consumer Finances, the Survey of Income and Program Participation, and IRS Form 5500. Several relevant questions are addressed. First, what types of workers are most likely to be in a participant directed plan and what types of employers are most likely to offer such plans? Second, how does participant direction affect the allocation of assets and the risk/return performance of the pension? The study has two important findings. First, participant direction has a significant effect on asset allocation in pension plans, shifting pensions away from employer stock and towards other types of stock. Second, based on risk-adjusted rates of return, participant directed plans actually outperform employer directed plans.
Defined Contribution Pension Plans and Retirement Wealth Adequacy
Gary V. Engelhardt, 2005 | Full Text
This project uses a newly developed defined contribution (DC) pension wealth calculator to generate new estimates of DC pension wealth for individuals in the Health and Retirement Study (HRS) with employer-provided pension Summary Plan Descriptions (SPD). There are four primary findings. First, pension wealth from voluntary saving (and accrued earnings thereon) comprises half of DC pension wealth calculated from the sample of matched SPDs in the HRS. Second, the DC/401(k) Calculator yields dramatically lower mean estimates of DC pension wealth for HRS participants than the Pension Estimation Program. In particular, DC pension wealth is calculated to be as much as 20-25 percent less when using an increase in the number of modeling assumptions offered to the user and arguably better input data, and wealth in 401(k)-type pension plans is implied to be as much as 40-50 percent less. Third, most of the reduction in estimated DC wealth occurs in the upper portion of the pension-wealth distribution. Fourth, the Pension Estimation Program actually understates DC wealth in the middle of the pension-wealth distribution. These results suggest that previous analyses that have used HRS pension wealth created from the matched SPD data have overstated retirement wealth adequacy among HRS participants.
Valuing Assets in Retirement Savings Accounts
James M. Poterba, 2004 | Full Text
Assets in retirement saving plans have become an important component of net worth for many households. While many studies compare household balances in tax-deferred retirement accounts such as 401(k) plans with the financial assets held outside these accounts, these different asset components are not directly comparable. Taxes and in some cases penalties are due when assets are withdrawn from some retirement saving plans. These factors can make a dollar held inside a retirement account less valuable than a dollar held in a similar asset outside these accounts, particularly for those who are considering withdrawing assets from the tax-deferred accounts in the near future. For younger households who do not plan to withdraw tax deferred assets for many years, the opportunity for tax-free compound returns in retirement accounts can make a dollar inside such an account more valuable than a dollar outside such accounts from the standpoint of providing retirement resources, even though the principal from the retirement account will be taxed at the time of distribution, while the principal outside such accounts is untaxed. This paper illustrates the potential differences in the value of a dollar of invested in a bond, or in corporate stock, inside and outside tax-deferred accounts. It draws on a range of data sources to calibrate the value of the tax burden, and the benefit of compound growth, for assets held in retirement accounts, and describes the differences in relative valuation for households of different ages.
The Causes and Consequences of Pension Fund Holding of Employer Stock
William Even and David Macpherson, 2004 | Full Text
This report examines the causes and consequences of investing pension funds in employer stock using a merger of data from Form 5500 pension filings and stock return data from the Center for Research on Security Prices (CRSP). Section II reviews the existing hypotheses and related empirical evidence on factors that lead pension funds to invest in employer stock. Results from the Capital Asset Pricing Model are employed in section III to derive a measure of the non-diversification costs of holding employer stock. Section IV provides a description of the data used in our study and an empirical analysis of factors influencing pension fund holdings is provided in section V. The effect of employer stock holdings on the risk and return of pension portfolios is examined in section VI along with projections of how legislated limits on employer stock holdings would affect the distribution of returns.
How Much and In What Manner Should Americans Save?
Jagadeesh Gokhale and Laurence J. Kotlikoff, 2004 | Full Text
This study uses ESPlannerTM -- a life-cycle, financial planning model -- to investigate how much American households should save and to understand the best form in which to do so. ESPlanners saving and life insurance recommendations generate the smoothest possible survival-state contingent lifetime consumption path for the household without putting it into debt. Such consumption smoothing is predicted by economic theory and appears, in general, to accord with actual behavior. By running households through ESPlanner based on current policy as well as on alternative fiscal policies, one can easily compare the program's recommended consumption and saving response to hypothetical tax and transfer policy changes and assess the degree to which borrowing constraints (the inability to borrow significant amounts beyond ones mortgage) may be playing a role in determining the size of those responses. The program can also indicate what method of saving, be it in 401(k) and other tax-deferred accounts, Roth IRAs, or in non-retirement accounts is most efficacious with respect to minimizing lifetime taxes and maximizing lifetime consumption.
The 964 households used in our analysis are drawn from the Federal Reserve's 1995 Survey of Consumer Finances. This data set provides detailed information on household earnings, assets, housing, demographics, and retirement plans -- all of which is used by ESPlanner in formulating its recommendations. The policies we consider are tax hikes, tax cuts, social security benefit cuts, and the elimination of tax-deferred saving. Our analysis distinguishes between immediate and future policy changes as well as between permanent and temporary ones.
Our results are strongly influenced by the fact that a majority58 percentof our sample of households, many of which are young, is borrowing-constrained and, thus, more responsive to current than future policy changes no matter how long their duration. Borrowing constraints refer to the inability to smooth ones consumption without incurring additional non-mortgage debt. In running ESPlanner, we assume that households cannot borrow simply to smooth their living standards, as apart from buying a home. This ignores the ability of households to borrow relatively small sums on their credit cards. But including a relatively small credit card borrowing limit would make very little difference to our results. While we assume a zero-non mortgage debt limit in running our sample households through the program, the fact that 58 percent of the households cant perfectly smooth their living standards without going into debt represents a finding, rather than an assumption, of our analysis.
Because so many of our sample households are borrowing constrained, their consumption and saving responses to policy changes are very sensitive to the particular policy being enacted. Income tax changes, for example, have little effect on the consumption/saving of low-income households for the simple reason their income tax liabilities are relatively small. And social security benefit cuts will have minor effects on the young because they lie so far in the future and the young are generally borrowing constrained. On the other hand, eliminating tax-deferred saving will have no effect on current retirees, but greatly influence the spending of the young, since such a policy would relax their borrowing constraints. We also show that a small segment of households would end up raising their lifetime taxes and reducing their lifetime consumption by contributing to tax-deferred retirement accounts. For these households switching to Roth IRAs appears to be advantageous.
Cross-Trading by ERISA Plan Managers
Thomas H. McInish, Ph.D., C.F.A., 2002 | Full Text
ERISA prohibits cross trades, the exchange of assets between two accounts without going through a public market. There have been numerous exemption requests motivated by a desire to reduce transaction costs (typically one to four percent). Mutual fund cross trades under Rule 17a-7 achieve economically significant savings. Transaction costs comprise commissions, market impact, and opportunity costs of missed trades. Further, round trip trades incur a bid-ask spread, which covers order processing costs (the normal expenses of providing liquidity) and asymmetric information costs (dealer losses to informed traders). Dealer quotes reflect asymmetric information costs and trade size. Trade prices exhibit regularities, including U-shaped patterns in returns and volume. Without a market trade, it is impossible to know what price each counterparty would have paid/received. If both parties are equally motivated and seek to trade at the same time, it makes sense to cross at the spread midpoint. But if one party typically uses patient trading strategies or is accommodating the counterparty, determination of a fair crossing price is difficult. If the goal is to minimize risk, cross trading should be prohibited. In a cost-benefit context, steps such as having written implementation plans and strong monitoring can reduce risk of abuse.
New Trends in Pension Benefits and Retirement Provisions
Olivia S. Mitchell, 2000 | Full Text
Private sector pension plans have undergone substantial change in form and structure in the United States over the last two decades. This paper explores and evaluates these changes using information on pension plan characteristics gathered by the U.S. Department of Labor (DOL) since 1980 in their periodic Employee Benefits Survey (EBS) of medium and large establishments. We also discuss how future data collection efforts could be improved to better measure key changes in the form and design of employer-sponsored pensions.
Key findings are as follows: Many aspects of defined benefit plans changed over time. For example, vesting rules were loosened; plans eased access to normal retirement; and pension benefit formulas moved toward final rather than career earnings, with increased weight on straight-time pay. In addition, these plans became more integrated with social security; at the same time, the form of social security integration changed substantially. The evidence also indicates that defined benefit plan replacement rates fell over time and benefit caps limit years of service counted in the retirement formula. In addition, disability benefit provisions grew more stringent; and participants were increasingly permitted to take a lump sum from their defined benefit plan.
Defined contribution plans also have evolved over time. Here, plan participants were granted greater access to diversified stock and bond funds, and fewer were permitted to invest in own-employer stock, common stock funds, and guaranteed insurance contracts. Participation and vesting rules appear most lenient for workers in 401(k) plans; generally employees must contribute a fraction of their pay to their plans rather than relying only on employer contributions; and employee access to pension fund assets prior to retirement is growing.