Lump-Sum Distributions at Job Change, p. 2

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1 Jnury 2009 Vol. 30, No. 1 Lump-Sum Distributions t Job Chnge, p. 2 E X E C U T I V E S U M M A R Y Lump-Sum Distributions t Job Chnge GROWING NUMBER OF WORKERS FACED WITH ASSET DECISIONS AT JOB CHANGE: With 401(k)-type retirement plns now dominnt nd trditionl pensions offering lump-sum distributions t retirement, growing number of workers re fced with mking decisions bout wht to do with the ssets they hve erned in their employment-bsed plns when they chnge jobs. After leving employment with retirement pln sponsor, the worker hs three choices for his or her retirement ccount: Leve the money in the pln, roll it over to nother tx-qulified svings vehicle, or csh it out. RETAINING RETIREMENT ASSETS AT JOB CHANGE A MAJOR ISSUE: Workers future finncil dequcy in retirement cn be profoundly ffected by whether their lump-sum distributions t job chnge re cshed out or retined in nother svings vehicle. This is prticulrly the cse for younger workers nd those with lrge blnces. This rticle uses 2006 dt (the ltest vilble) from the Census Bureu s Survey of Income nd Progrm Prticiption (SIPP) to nlyze the decisions mde by workers t job chnge when they receive lump-sum pyment from n employment-bsed retirement pln. AVERAGE AND MEAN DISTRIBUTIONS: About 16.2 million working-ge Americns reported ever hving received lump-sum distribution from retirement pln when chnging jobs, through April of The verge mount of these distributions ws $32,219 (in 2006 dollrs) nd the medin (mid-point) mount ws $10,000. MOST DISTRIBUTIONS GENERALLY SMALL: For the most prt, the mounts of the lump-sum distributions were reltively smll just over 21 percent of the distributions were less thn $2,500. Just over 16 percent were $50,000 or more. The rest of the distributions (bout 63 percent) were between $2,500 nd $50,000. ROLLOVER TRENDS ARE MIXED: The dt show tht n incresing percentge of retirement pln prticipnts re rolling over ll of their lump-sum distributions on job chnge, nd fewer re spending ny of their distributions on consumption. However, the dt lso show tht pproximtely 60 percent of those who took lump-sum pyment did not roll ll of it into tx-qulified svings, lthough not ll of those distributions were spent exclusively on consumption but insted were used for home purchses, strting business, or pying down debt. This behvior vried significntly cross prticipnts ges nd the mount of the distribution, with older individuls (up to ge 65) nd those with higher blnces more likely to roll over their ssets. YOUNGER WORKERS MOST AT RISK OF SPENDING THEIR LUMP-SUM DISTRIBUTIONS: The dt suggest tht mny workers, prticulrly younger ones, do not understnd or vlue the fct tht smll mount of svings cn mke significnt impct on retirement ssets due to compound interest. By cshing out even smll mounts, younger prticipnts re scrificing potentilly importnt sset for their retirement. A monthly newsletter from the EBRI Eduction nd Reserch Fund 2008 Employee Benefit Reserch Institute

2 Lump-Sum Distributions t Job Chnge By Crig Copelnd, EBRI As more workers re prticipting in defined contribution plns (typified by the 401(k) pln) nd re in defined benefit (pension) plns tht llow lump-sum distribution, n incresing number of them re fced with mking decisions bout wht to do with the ssets they hve erned in these plns when they chnge jobs. 1 After leving employment with retirement pln sponsor, the worker hs three choices for his or her retirement ccount: Leve the money in the pln. Roll it over to nother tx-qulified svings vehicle (nother employment-bsed pln or n individul retirement ccount (IRA)). Csh it out (to spend it or to invest/sve it in nother mnner thn through tx-qulified svings vehicle). This choice cn profoundly ffect prticipnts finncil resources in retirement, prticulrly in the cse of younger workers nd those with lrge blnces. 2 Consequently, to determine whether individuls re ccumulting nd retining the ssets they will need for finncil dequcy in retirement, it is importnt to understnd wht they do with their retirement pln ssets when leving job. This rticle focuses on the decisions tht workers t job chnge mke on receipt of lump-sum pyment from n employment-bsed retirement pln: whether to roll the ccount blnce over to nother tx-qulified svings vehicle, spend the ssets, or invest/sve the ssets in nother mnner. The number nd mounts of lump-sum distributions re estimted, followed by discussion of wht individuls re doing with these distributions nd n nlysis of importnt determinnts of the decision to roll over the distribution versus using the ssets for other resons. These results re derived from recently relesed dt from the U.S. Census Bureu The Pension nd Retirement Pln Coverge Topicl Module 7 of the 2004 Survey of Income nd Progrm Prticiption (SIPP) which includes lump-sum dt for individuls through This reserch updtes prior studies on lump-sum distributions done by the Employee Benefit Reserch Institute. 4 Lump-Sum Distributions: An Overview In the 2004 Pnel of SIPP, pproximtely 16.2 million Americns ge 21 nd over reported ever hving received lump-sum distribution from retirement pln on previously held job (when chnging jobs) through April of Respondents were sked further questions bout their distribution or, if they hd more thn one, their most recent distribution, to better understnd the uses (rollover, spending on consumption, eduction expenses, housing purchse/improvement, strting business, or some other investment) nd the size of these distributions. The size or mount of the distribution ws reported in the survey in terms of its vlue t the time of the distribution. However, since some of these distributions were tken mny yers go, the distributions reltive vlue to current prices is not the sme. Consequently, the mount of the distributions is presented with respect to both the vlue when the distribution ws received nd in 2006 dollrs, by djusting the reported vlues by the consumer price index so tht vlues re in the sme dollr terms. The men (verge) mount of these distributions in 2006 dollrs ws $32,219, with medin (mid-point) mount of $10,000 (Figure 1). In terms of the vlue t the time of the distributions, the men mount ws $23,880 nd the medin mount ws $7,500. For distributions tken in 1980 or fter, the verge nd medin mounts declined with time. For exmple, for distributions tken from , the verge distribution in 2006 dollrs ws $47,679, compred with $22,166 for distributions tken between The medin lso declined, from $15,107 to $7,497. (For the vlue of the distribution when tken, the verge distribution incresed from $23,410 for those tken during to $27,673 during , then decresed to $21,927 during ) The mounts of the lump-sum distributions for the most prt were reltively smll, with 5.0 percent of recipients reporting distribution of less thn $500 (in 2006 dollrs), 4.4 percent reporting from $500 to less thn $1,000, nd 11.9 percent reporting from $1,000 to less thn $2,500 for totl of 21.3 percent of the distributions being less thn $2,500 (Figure 2). The rest of the distributions, except for the 16.2 percent tht were $50,000 or more, were between $2,500 nd $50,000, with those distributions being somewht eqully divided (in the percent rnge of the totl) mong the $2,500 $4,999, $5,000 $9,999, $10,000 $19,999, nd $20,000 $49,999 distribution ctegories. Approximtely 23 percent of the lump-sum distribution recipients reported hving received their most recent distribution from , nd nother 34 percent from , wheres only 4.0 percent received their most recent distribution before 1980 (Figure 3). Consequently, more thn 55 percent of the distributions in this study took plce fter As for the ge t which the recipients received these most recent distributions, just over 50 percent were between the ges of 21 nd 40 (Figure 4). ebri.org Notes Jnury 2009 Vol. 30, No. 1 2

3 Figure 1 Men nd Medin Amounts of Lump-Sum Distributions, by Yer of Most Recent Distribution Received, Workers Age 21 nd Over, Through 2006 $70,000 $67,374 $60,000 $50,000 $47,679 Men 2006 Dollrs Medin 2006 Dollrs Men Distribution Yer Dollrs Medin Distribution Yer Dollrs $40,000 $32,219 $38,644 $35,309 $30,000 $20,000 $10,000 $10,000 $23,880 $7,500 $20,040 $14,935 $4,200 $15,107 $23,410 $8,000 $14,235 $25,154 $10,000 $10,983 $27,673 $27,128 $23,822 $22,166 $21,927 $9,000 $8,700 $7,500 $7,497 $7,244 $0 All Before Yer of Distribution Workers who hd left job but not retired. 2 18% 16% 14% 12% 2006 Dollrs Figure 2 Shre of Lump-Sum Recipients, by Amount of Most Recent Distribution of Workers Age 21 nd Over, 2006 Distribution Yer Dollrs 11.9% % 11.9% 16.2% 17.4% 15.9% 17.4% 18.2% 14.8% 16.2% 13.4% 1 8% 6% 4% % 4.4% 5.4% 2% $1 $499 $500 $999 $1,000 $2,499 $2,500 $4,999 $5,000 $9,999 $10,000 $19,999 $20,000 $49,999 $50,000 or more Amount of Distribution Workers who hd left job but not retired. ebri.org Notes Jnury 2009 Vol. 30, No. 1 3

4 Figure 3 Percentge of Lump-Sum Recipients by Yer of Most Recent Distribution Received, Workers Age 21 nd Over, % Before % % % % Workers who hd left job but not retired. Figure 4 Proportion of the Most Recent Lump-Sum Distribution, by the Receipent's Age t the Time of the Distribution, 2006 Age % Age 65 nd Older 3.9% Age % Age % Age Age % Age % ebri.org Notes Jnury 2009 Vol. 30, No. 1 4

5 Benefit Preservtion Trends The gol of retirement svings plns such s 401(k) pln is to provide income for individuls in their retirement. For this to hppen, prticipnts in these plns must preserve their benefits until retirement by retining ny existing pln blnce on job termintion. This section looks t the percentge of lump-sum recipients who roll over their ssets to tx-qulified pln (n IRA or nother employment-bsed retirement pln), thereby preserving their benefits, t lest initilly, rther thn cshing them out. Among those who reported in 2006 ever hving received distribution, 47.3 percent reported rolling over t lest some of their most recent distribution to tx-qulified svings 6 (Figure 5). This is higher thn the mount reported for workers receiving distributions most recently through Furthermore, mong those who received their most recent distributions through 2006, the percentge who used ny portion of it for consumption 8 ws lso lower, t 16.9 percent (compred with 25.2 percent of those whose most recent distributions were received through 2003 nd 38.3 percent through 1993). However, there ws n uptick in the percentge of recipients through 2006 who used their lump sum for debts, business, nd home expenses, nd decrese in the percentge sving in nontx-qulified vehicles reltive to distributions through The percentge of lump-sum recipients who used the entire mount of their most recent distribution for txqulified svings incresed shrply since 1993, to 44.3 percent of those who received their most recent distribution through 2006, compred with 19.3 percent of those who received their most recent distribution through 1993 (Figure 6). Furthermore, the percentge of recipients whose most recently received distribution ws entirely spent on consumption ws 9.2 percent for those whose distributions were received through 2006, compred with 22.7 percent for those who received distributions through An importnt fctor in the chnge in the reltive percentges between the 1993 nd 2006 dt is the percentge of lump sums tht were used for only one purpose. Among individuls who received their most recent distributions through 2006, 93.7 percent of those who rolled over t lest some of their most recent distribution rolled over the entire mount, wheres only 46.5 percent of those who rolled over t lest some of their most recent distribution through 1993 did so. 9,10 Therefore, while trend to more benefit preservtion does not look promising when nlyzing the use of ny portion of the lump-sum distribution, trend for more preservtion is reveled to be quite substntil on n entire-use bsis, s virtully ll of those who rolled over their lump sum rolled over the entire mount. In ddition, the decline in the use of n entire distribution for consumption ccelerted Another technique to check the trend in the percentge of workers who roll over their ssets reltive to cshing them out is to use the 2004 SIPP Topicl Module 7 dt to exmine when the most recent distributions were received within the dtset, insted of cross dtsets. The most recent distributions from these dt re broken down into six ctegories: before 1980, , , , , nd In this nlysis, the likelihood of ny of the most recent distributions going to tx-qulified svings incresed with time before declining for the most recent distributions (Figure 7). 11 Among workers who received their most recent distributions between 1994 nd 1998, 51.8 percent used some portion for tx-qulified svings, wheres only 17.8 percent of those who received their distributions before 1980 used some portion for tx-qulified svings. However, this percentge ws lower (46.0 percent) for those who received distribution from 2004 to The percentge of recipients using ny portion of their most recent lump-sum distribution for consumption followed the opposite pttern, except for the increse in the most recent distributions. Among those who received distributions before 1980, 33.4 percent used some proportion for consumption, compred with only 14.3 percent of those who received distributions from nd 16.6 percent of recipients from (Figure 8). Both nlysis techniques show tht the percentge of lump-sum recipients using some portion of their most recent distribution for tx-qulified svings ws significntly higher in 2006 thn it ws in 1993, despite decline for the most recent ( ) distributions within the 2004 SIPP. Furthermore, the percentge who used ny portion of their distribution for consumption hs significntly decresed, even tking into ccount the smll rise in the most recent distributions. Consequently, the preservtion of benefits ppers to hve improved from 1993 to Moreover, recipients who did not use their lump sum for tx-qulified svings were more likely to use it to improve their finncil condition by pying down debt or buying home rther thn spending it on dditionl consumption. A possible mjor driver of the trend to roll over the entire distribution ws the federl government s estblishment of 20 percent withholding rte on distributions not directly rolled over fter Other resons include better eduction nd the likelihood tht the pln ws the worker s only retirement svings vehicle. However, the decrese in benefit preservtion of the most recent distributions indicted in recent dt my be due to the need to py down debts or to use for downpyments on home purchses, which becme incresingly expensive in mny res of the country during Determinnts of Benefit Preservtion Two importnt fctors in the use of lump-sum distributions exclusively for tx-qulified svings pper to be the ge of the recipient nd the size of the distribution. The likelihood of the distribution being rolled over entirely to txqulified svings incresed with the ge of the recipient t the time of receipt until ge 65, fter which substntil decline begn for the oldest recipients. Among those receiving distributions when they were ges 61 64, 64.0 percent ebri.org Notes Jnury 2009 Vol. 30, No. 1 5

6 Figure 5 Proportion of Lump-Sum Recipients Reporting Vrious Uses for Any Portion of Their Most Recent Distribution, Workers Who Chnged Jobs Age 21 nd Over, 1993, 1998, 2003, nd % 47.3% 45% 4 35% 3 25% 41.5% 38.7% % 35.9% % 38.3% 26.6% 25.2% 2 15% 1 5% Tx-Qulified Finncil Svingsb % 11.1% % 2.9% 2.4% 1.5% 1.7% d e Non Tx-Qulified Finncil Debts, Business, nd Home Eduction Expenses Consumption Svingsc Use of Any Portion of Distribution Source: Employee Benefit Reserch Institute estimtes from the 1996, 2001, nd 2004 Pnels of the Survey of Income nd Progrm Prticiption Topicl Module 7 nd April 1993 Employee Benefits Supplement to the Current Popultion Survey. Workers who hd left job but not retired. b Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. c Includes svings ccounts, other finncil investments, nd other svings. d Includes purchse of home, strt or purchse of business, pyments towrd debt, bills, lons, or mortgge. e Includes purchses of consumer items (cr, bot), medicl nd dentl expenses, generl everydy expenses, nd other spending. 5 45% 4 35% Figure 6 Proportion of Lump-Sum Recipients Reporting Using Entire Portion of Their Most Recent Distribution for Ech Use, Workers Who Chnged Jobs Age 21 nd Over, 1993, 1998, 2003, nd % 43.4% 44.3% % 2 15% 1 5% 19.3% Tx-Qulified Finncil Svings b 8.1% 6.9% 6.2% 4.6% 17.6% 25.8% 21.8% 26.1% 1.1% 1.4% 0.8% % 14.4% 15.1% Non Tx-Qulified Finncil Debts, Business, nd Homed Eduction Expenses e Consumption Svings c Use of Entire Distribution Source: Employee Benefit Reserch Institute estimtes from the 1996, 2001, nd 2004 Pnels of the Survey of Income nd Progrm Prticiption Topicl Module 7 nd April 1993 Employee Benefits Supplement to the Current Popultion Survey. Workers who hd left job but not retired. b Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. d Includes svings ccounts, other finncil invesments, nd other svings. d Includes purchse of home, strt or purchse of business, pyments towrd debt, bills, lons, or mortgge. e Includes purchse of consumer items (cr, bot), medicl nd dentl expenses, generl everydy expenses, nd other spending. 9.2% ebri.org Notes Jnury 2009 Vol. 30, No. 1 6

7 6 Figure 7 Proportion of Lump-Sum Recipients Reporting Using Any Portion of Their Most Recent Distribution Through 2006 for Tx-Qulified Finncil Svings by Yer of Receipt, Workers b Age 21 nd Over % 51.8% 50.6% % % 1 Before Yer of Distribution Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. b Workers who hd left job but not retired. 4 Figure 8 Proportion of Lump-Sum Recipients Reporting Using Any Portion of Their Most Recent Distribution Through 2006 for Consumption, by Yer of Receipt, Workers b Age 21 nd Over 35% 33.4% 3 25% 21.4% 2 15% 18.2% 15.5% 14.3% 16.6% 1 5% Before Yer of Distribution Includes purchses of consumer items (cr, bot), medicl nd dentl expenses, generl everydy expenses, nd other spending. b Workers who hd left job but not retired. ebri.org Notes Jnury 2009 Vol. 30, No. 1 7

8 7 6 Figure 9 Proportion of Lump-Sum Recipients Using Entire Portion of Their Most Recent Distribution Through 2006 for Tx-Qulified Finncil Svings by Age t Time of Most Recent Distribution, Workers b Age 21 nd Over 54.6% % 44.3% 47.4% 40.7% % nd older Age t Time of Most Recent Lump-Sum Distribution Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. b Workers who hd left job but not retired Figure 10 Proportion of Lump-Sum Recipients Using Entire Portion of Their Most Recent Distribution Through 2006 for Tx-Qulified Finncil Svings, by the Amount of the Most Recent Distribution, Workers b Age 21 nd Over % 72.4% Dollrs Distribution Yer Dollrs 52.5% 58.3% % 44.2% 46.5% 46.7% % 37.4% % 19.5% 18.7% 23.7% 23.5% 1 $1 $499 $500 $999 $1,000 $2,499 $2,500 $4,999 $5,000 $9,999 $10,000 $19,999 $20,000 $49,999 $50,000 or more Amount of Most Recent Lump-Sum Distribution Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. b Workers who hd left job but not retired. ebri.org Notes Jnury 2009 Vol. 30, No. 1 8

9 used their distribution entirely for tx-qulified svings, compred with 34.8 percent of those who were ges (Figure 9). 12 Similrly, the lrger the distribution, the more likely it ws kept entirely in tx-qulified svings. Among recipients with distributions of $1 $499 (in 2006 dollrs), 17.0 percent rolled over their distributions exclusively to tx-qulified svings, compred with 72.4 percent of those with distributions of $50,000 or more (Figure 10). Conclusion Becuse of their portbility, benefits in defined contribution retirement plns hve the dvntge of potentilly experiencing rel growth rther thn only nominl growth through investment returns when individuls chnge jobs. This is in contrst to defined benefit (pension) plns, in which the benefits re bsed on the prticipnts yers of prticiption nd wge history t the time of job termintion nd remin t tht reltive vlue until distributions commence. However, the dvntge of defined contribution plns cn be compromised if pln prticipnts csh out their benefits prior to retirement insted of preserving them. 13 This rticle ssesses the likelihood tht lump-sum recipients will csh out or retin benefits from employment-bsed retirement plns once the decision is mde to tke distribution from pln. The dt show tht n incresing percentge of employment-bsed retirement pln prticipnts re rolling over ll of their lump-sum distributions on job chnge, nd fewer re spending ny of their distributions on consumption. However, the dt lso show tht pproximtely 60 percent of those who took lump-sum pyment did not roll ll of it into tx-qulified svings (Figure 5), lthough not ll of those distributions were spent exclusively on consumption but insted were used for home purchses, strting business, or pying down debt. This behvior vried significntly cross prticipnts ges t the time of the distribution nd the mount of the distribution, with older individuls (up to ge 65) nd those with higher blnces more likely to roll over their ssets. This suggests tht some individuls, prticulrly younger ones, do not understnd or vlue the fct tht smll mount of svings cn mke significnt impct on retirement ssets due to compound interest. By cshing out even smll mounts, younger prticipnts re scrificing potentilly importnt sset for their retirement. 14 Figure 11 Percentge of Lump-Sum Distribution Recipients of $1,000 to $5,000 t the Time of the Distribution Who Used the Entire Distribution For Vrious Uses, by Time of the Distribution, % 35% 35.1% % 28.2% 25% 2 15% % 11.4% 5% b c Tx-Qulified Finncil Svings Consumption Debts, Business, nd Home Distributions through 2004 Distributions in 2005 or 2006 Includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. b Includes purchse of consumer items (cr, bot), medicl nd dentl expenses, generl everydy expenses, nd other spending. c Includes purchse of home, strt or purchse of business, pyments towrds debt, bills, lons, or mortgge. ebri.org Notes Jnury 2009 Vol. 30, No. 1 9

10 One possible reson tht lrge percentge of smll blnces re being cshed out is the bility of privte-sector pln sponsors to require individuls to tke lump sum if their blnce is less thn $5,000. Consequently, mny individuls with smll blnces my be unwre of the tx implictions nd csh the check they receive from the pln sponsor fter job termintion. A provision in the Economic Growth nd Tx Relief Reconcilition Act of 2001 (EGTRRA) estblished rollover IRA s the defult option for lump-sum distributions of less thn $5,000 but no less thn $1,000. This provision, which becme effective Mrch 28, 2005, ws introduced to increse the likelihood of rollovers mong those with the blnces in this rnge. Using dt from the 2004 SIPP pnel on the portion of recipients of distributions between $1,000 nd $5,000 t the time of the distribution who roll over ll of their distribution to tx-qulified svings, the percentge of those receiving these distributions in 2004 or before cn be compred with the percentge of those receiving the distributions in 2005 or The result does not show sttisticlly significnt difference: 30.2 percent of those who took distribution through 2004 rolled over ll of it, while 28.2 percent of those who took distribution in 2005 or 2006 did so (Figure 11). Furthermore, the percentge who used the distribution only for consumption lso remined unchnged sttisticlly. While EGTRRA hs the potentil to help increse the percentge of those choosing rollover, it will not prevent mny individuls from tking the money nd spending it when they leve job. Therefore, to significntly reduce the number of retirement pln prticipnts who csh out their lump-sum distributions, more eduction or possibly incentives re needed to help them understnd the importnce of retining these ssets for retirement. Otherwise, the dvntge of retirement pln sset portbility will be lost, possibly forcing mny workers to rely only on the funds tht hve ccumulted during their lst job before retiring if they prticipted in pln or solely on Socil Security to provide their retirement income. This could result in the government (txpyers) being clled upon to provide retirees with retirement income protection t time when both Socil Security nd Medicre re projected to be unble to fund the benefits now estblished by lw. Endnotes 1 According to n unpublished nlysis of the 2004 Pnel of Survey nd Income Progrm Prticiption Retirement nd Pension Pln Coverge Topicl Module 7, 67.1 percent of employment-bsed retirement pln prticipnts considered defined contribution pln to be their primry retirement pln, compred with 25.8 percent in Furthermore, for those prticipting in defined benefit pln, lump-sum distributions re incresingly vilble. See, for exmple, U.S. Deprtment of Lbor, Bureu of Lbor Sttistics, Ntionl Compenstion Survey: Employee Benefits in Privte Industry in the United Sttes, 2005 Bulletin (2007), nd Ntionl Compenstion Survey: Employee Benefits in Privte Industry in the United Sttes, (2005). The percentge of ll privte industry employees eligible for lump-sum distribution incresed from 48 percent in 2002 to 52 percent in 2005, compred with 23 percent nd 15 percent of full-time workers prticipting in defined benefit pln in medium or lrge estblishment tht were offered lump-sum distribution in 1997 nd 1995, respectively (U.S. Deprtment of Lbor, Bureu of Lbor Sttistics, Employee Benefits in Medium nd Lrge Privte Estblishments, 1997 (1999), nd Employee Benefits in Medium nd Lrge Privte Estblishments, 1995 (1998), 2 For exmple, 25-yer-old who leves n employer fter ccumulting $5,000 ccount blnce would hve pproximtely $24,600 t ge 65, ssuming constnt 4 percent nnul rte of return compounded monthly. 3 The 2004 Pnel of the Survey of Income nd Progrm Prticiption (SIPP), conducted by the U.S Census Bureu, follows the sme households for two-nd-one-hlf-yer period, sking vrious questions on their economic nd demogrphic sttus. The survey prticipnts re interviewed t four-month intervls bout core set of demogrphic nd economic issues. In ddition, topicl modules tht sk more specific questions bout importnt economic issues re sked. The Retirement nd Pension Pln Coverge Topicl Module 7 ws fielded in Jnury April 2006 nd sked questions bout workers prticiption in retirement nd/or pension plns in ddition to the questions on lump-sum distributions. For more informtion bout SIPP, see 4 See Crig Copelnd, Lump-Sum Distributions, EBRI Notes, no. 12 (Employee Benefit Reserch Institute, December 2005): 7 17; Crig Copelnd, Lump-Sum Distributions: An Updte, EBRI Notes, no. 7 (Employee Benefit Reserch Institute, July 2002): 1 8, nd the cittions therein from both cdemic studies nd service-provider studies on lump-sum distribution decisions. Also see Crig Copelnd, Retirement Pln Prticiption nd Retirees Perception of Their Stndrd of Living, EBRI Issue Brief, no. 289 (Employee Benefit Reserch Institute, Jnury 2006) for more results from the 2001 Pnel of SIPP. Other reserch on lump-sum distributions includes recent study by the Investment Compny Institute tht exmines distribution choices t just retirement (not preretirement) nd finds smll mount spent t the time of the distribution. See John Sblehus, Michel Bogdn, nd Srh Holden, Defined Contribution Plns Choices t Retirement: A Survey of Employees Retiring Between 2002 nd 2007, Investment Compny Institute Reserch Series, December 5, 2008 (Investment Compny Institute, Fll 2008), In ddition, pln dminister study done by Hewitt Assocites found tht 45 percent of 401(k) prticipnts who left their jobs in 2005 cshed out their lump sum, 32 percent left ebri.org Notes Jnury 2009 Vol. 30, No. 1 10

11 it in the pln, nd 23 percent rolled it over to nother tx-qulified pln. They were not ble to determine wht the individuls who cshed out their lump sum did with it (spent it, invested it, pid down debt, etc.). Furthermore, study by reserchers t Vngurd found tht 27 percent of defined benefit pln prticipnts from two lrge plns who were eligible for lump-sum distribution chose to tke nnuity s the pyout option, while 17 percent did so from csh blnce plns (Gry R. Mottl nd Stephn P. Utkus, Lump Sum or Annuity? An Anlysis of Choice in DB Pension Pyouts, Vngurd Center for Retirement Reserch, Vol. 30, November 2007, 5 This includes individuls who were prticipnts in the pln long with ny survivors of those who were in pln. This does not fctor in the prticipnts who left their ssets behind in the pln. The percentge of individuls who left their ssets in previous employers pln hs been estimted to be pproximtely one-third; see Hewitt study from footnote 4 nd Copelnd (2006), op. cit. 6 This includes investment in individul retirement ccounts (IRAs), rollovers to IRAs, individul nnuities, nd other employment-bsed retirement plns. 7 The results for the lump-sum distributions most recently received through 1993 re tbulted from the April 1993 Employment Benefits Supplement to the Current Popultion. See Employee Benefit Reserch Institute, Employment-Bsed Retirement Income Benefits: Anlysis of the April 1993 Current Popultion Survey, EBRI Issue Brief, no. 153 (Employee Benefit Reserch Institute, September 1994), for further informtion nd results from this survey. The results for the most recent distributions through 1998 re from the 1996 Pnel of the Survey of Income nd Progrm Prticiption Retirement nd Pension Pln Coverge Topicl Module 7; see Copelnd (2002), op. cit., for further results from this dtset. The results for the most recent distributions through 2003 re from the 2001 Pnel of the Survey of Income nd Progrm Prticiption Retirement nd Pension Pln Coverge Topicl Module 7, see Crig Copelnd (2005), op. cit., for further results from this dtset. It is possible tht some individuls could hve hd lump-sum distribution before 1993, between 1994 nd 1998, between 1999 nd 2003, nd between 2004 nd Where the 1996 SIPP only sked bout the most recent distribution tht occurred through 1998, the 2001 SIPP sked bout the most recent through 2003, while the 2004 SIPP sked bout the most recent through Therefore, the chnge could result both becuse some individuls chose to do something different with their distribution the next time s well s dditionl individuls hving lump-sum distribution. The next section will exmine only those distributions occurring most recently through 2006 or only results from the 2004 SIPP. 8 This includes purchses of consumer items (e.g., cr, bot), medicl nd dentl expenses, generl everydy expenses, nd other spending. 9 This is clculted by tking the percentge of those using the entire portion of their lump-sum distribution for tx-qulified svings nd dividing it by the percentge tht used t lest some portion of their lump-sum distribution for tx-qulified svings for the respective yer. 10 This increse in the percentge of the entire use of the distribution being used for one purpose correltes with the introduction of the 20 percent withholding requirement for ny lump-sum distribution from n employment-bsed retirement pln not directly rolled over to nother tx-qulified svings vehicle estblished in the 1992 Unemployment Compenstion Amendments. 11 These results re only from the 2004 SIPP concerning their most recent distribution through 2006, so there is no replcement issue similr to those in the erlier results. 12 Strting t ge 59-1/2, retirement pln prticipnts cn tke tx-penlty-free ccount withdrwls. 13 As mentioned bove, greter vilbility of lump-sum distributions under defined benefit plns my limit the potentil dvntge of benefit preservtion under this type of pln. Consequently, the decision to tke lump-sum distribution is pertinent to prticipnts of both types of plns. 14 In some cses, spending the ccount blnce for certin purchses tht could be considered s investments, such s eductionl expenses or home purchses, could result in more secure retirement thn merely preserving the sset. ebri.org Notes Jnury 2009 Vol. 30, No. 1 11

12 EBRI Employee Benefit Reserch Institute Notes (ISSN ) is published monthly by the Employee Benefit Reserch Institute, th St. NW, Suite 878, Wshington, DC , t $300 per yer or is included s prt of membership subscription. Periodicls postge rte pid in Wshington, DC, nd dditionl miling offices. POSTMASTER: Send ddress chnges to: EBRI Notes, th St. NW, Suite 878, Wshington, DC Copyright 2009 by Employee Benefit Reserch Institute. All rights reserved, Vol. 30, no. 1. Who we re Wht we do Our publictions Orders/ subscriptions The Employee Benefit Reserch Institute (EBRI) ws founded in Its mission is to contribute to, to encourge, nd to enhnce the development of sound employee benefit progrms nd sound public policy through objective reserch nd eduction. EBRI is the only privte, nonprofit, nonprtisn, Wshington, DC-bsed orgniztion committed exclusively to public policy reserch nd eduction on economic security nd employee benefit issues. EBRI s membership includes cross-section of pension funds; businesses; trde ssocitions; lbor unions; helth cre providers nd insurers; government orgniztions; nd service firms. EBRI s work dvnces knowledge nd understnding of employee benefits nd their importnce to the ntion s economy mong policymkers, the news medi, nd the public. It does this by conducting nd publishing policy reserch, nlysis, nd specil reports on employee benefits issues; holding eductionl briefings for EBRI members, congressionl nd federl gency stff, nd the news medi; nd sponsoring public opinion surveys on employee benefit issues. EBRI s Eduction nd Reserch Fund (EBRI-ERF) performs the chritble, eductionl, nd scientific functions of the Institute. EBRI-ERF is tx-exempt orgniztion supported by contributions nd grnts. EBRI Issue Briefs re periodicls providing expert evlutions of employee benefit issues nd trends, s well s criticl nlyses of employee benefit policies nd proposls. EBRI Notes is monthly periodicl providing current informtion on vriety of employee benefit topics. EBRI s Pension Investment Report provides detiled finncil informtion on the universe of defined benefit, defined contribution, nd 401(k) plns. EBRI Fundmentls of Employee Benefit Progrms offers strightforwrd, bsic explntion of employee benefit progrms in the privte nd public sectors. The EBRI Dtbook on Employee Benefits is sttisticl reference work on employee benefit progrms nd work force-relted issues. Contct EBRI Publictions, (202) ; fx publiction orders to (202) Subscriptions to EBRI Issue Briefs re included s prt of EBRI membership, or s prt of $199 nnul subscription to EBRI Notes nd EBRI Issue Briefs. Individul copies re vilble with prepyment for $25 ech (for printed copies). Chnge of Address: EBRI, th St. NW, Suite 878, Wshington, DC, , (202) ; fx number, (202) ; e-mil: subscriptions@ebri.org Membership Informtion: Inquiries regrding EBRI membership nd/or contributions to EBRI-ERF should be directed to EBRI President/ASEC Chirmn Dlls Slisbury t the bove ddress, (202) ; e-mil: slisbury@ebri.org Editoril Bord: Dlls L. Slisbury, publisher; Stephen Blkely, editor. Any views expressed in this publiction nd those of the uthors should not be scribed to the officers, trustees, members, or other sponsors of the Employee Benefit Reserch Institute, the EBRI Eduction nd Reserch Fund, or their stffs. Nothing herein is to be construed s n ttempt to id or hinder the doption of ny pending legisltion, regultion, or interprettive rule, or s legl, ccounting, cturil, or other such professionl dvice. EBRI Notes is registered in the U.S. Ptent nd Trdemrk Office. ISSN: /90 $ , Employee Benefit Reserch Institute Eduction nd Reserch Fund. All rights reserved.