Rolling On Over

When it comes time to transition between jobs, 32% of retirement savers say their 401(k) assets are going into an Individual Retirement Account (IRA), according to a 2003 survey by American Century Investments. While that was the most popular option cited, a nearly identical 30% planned on rolling their retirement distribution into a plan offered by a new employer, and more than one in five said they would leave their defined contribution dollars with a prior employer's plan. Indeed, nearly half (45%) of those who said they would leave their account with their ex-employer's plan said they thought it was a better option.
 
On the other hand, 44% of those who planned on leaving the balance with a prior employer plan chose to do so because they found the rollover process confusing, too much hassle, or too time-consuming.
 
If only participants were leaving those balances in some kind of tax-sheltered savings vehicle. Research by Hewitt Associates in 2003 found that 42% of the 160,000 participants' records examined are taking 401(k) lump-sum distributions when they switch jobs, compared with only 6% who moved the money into their new employer's plan. In addition, a Congressional Research Service study notes that, among participants who have received at least one lump-sum distribution, only 36% said that they had rolled over the entire amount into another retirement plan (though that was 59% of the dollars distributed as lump sums).
 
For plan sponsors, the message is both optimistic and ominous. Retirement savings efforts are paying off—but, in too many cases, that "payoff" is coming years before the participant's actual retirement. Moreover, good intentions and prior behaviors notwithstanding, once that money is "in hand," it all too frequently becomes a tempting target for some "here and now" consumption.
 
Plan sponsors can help participants hang on to what they have—by helping them plan now for that future rollover. As always, we hope you find this month's Know How useful in communicating with your participants—and look forward to your feedback.
 
—The Editors 

PLANSPONSOR staff
editors@plansponsor.com