Magazine

Education/Advice | Published in July 2012

Pocket 'Watch'

Participants all too often opt for the cash instead of the rollover

By PLANSPONSOR staff | July 2012
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Illustration by Victo Ngai

According to the Employee Benefit Research Institute (EBRI), about 16.2 million working-age Americans reported having received a lump-sum distribution from a retirement plan when changing jobs and, through April 2006, the average amount of these distributions was $32,219, while the median amount was $10,000. EBRI’s study showed that most of these distributions were small—a fraction over 21% of them being less than $2,500—and indicate that a growing number of retirement plan participants roll over their entire lump-sum distribution on job change and that fewer spend any of it on consumption.

That said, the data also show that approximately 60% of those who took a lump-sum payment rolled only some of it into tax-qualified savings. In addition, while a more recent report from the Government Accountability Office (GAO) noted that cash-outs of account balances at job separation have remained relatively steady over time, it also said those cash-outs “can result in the largest amounts of leakage and the greatest proportional loss in retirement savings.” Fidelity Investments, for one, has seen an overall increase in loans and hardship withdrawals over the past few years.

For plan sponsors, the message is both optimistic and ominous. Retirement savings efforts do pay off, but, in too many cases, that payoff comes 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.

On the next page, Know How outlines the options most participants have for those distributions, with the hope that it will encourage more to leave those savings invested rather than spend them too soon. As always, we look forward to your responses. —PS


The EBRI study “Lump-Sum Distributions at Job Change” was summarized in EBRI’s January 2009 “Notes”; the GAO study “401(k) Plans” was published in August 2009.

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