Plan Sponsors Can Help With Retirement Income Strategies

An analysis of defined contribution participant distribution behavior supports the use of “through” target-date funds and the allowance of partial distributions from DC plans.

By Rebecca Moore | November 02, 2016
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Seven in 10 retirement-age participants (defined as those age 60 and older terminating from a defined contribution (DC) plan) have preserved their savings in a tax-deferred account after five calendar years, according to research from Vanguard.

In total, nine in 10 retirement dollars are preserved, either in an individual retirement account (IRA) or employer-sponsored DC plan account.

The three in 10 retirement-age participants who cashed out from their employer plan over five years typically held smaller balances. The average amount cashed out is approximately $20,000, whereas participants preserving assets have average balances ranging from $160,000 to $290,000, depending on the termination year cohort.

Only about one-fifth of retirement-age participants and one-fifth of assets remain in the employer plan after five calendar years following the year of termination. In other words, most retirement-age participants and their plan assets leave the employer-sponsored qualified plan system over time.

Vanguard examined the plan distribution behavior through year-end 2015 of 365,700 participants age 60 and older who terminated employment in calendar years 2005 through 2014.

One important question is how plan rules on partial distributions might affect participants’ willingness to stay within an employer plan. Eighty-seven percent of Vanguard DC plans in 2014 required terminated participants to take a distribution of their entire account balance if an ad hoc partial distribution was desired. For example, if a terminated participant has $100,000 in savings, and wishes to make a one-time withdrawal of $100, he or she must withdraw all savings from the plan—for example, by rolling over the entire $100,000 to an IRA and withdrawing the $100 from the IRA, or by executing an IRA rollover of $99,900 and taking a $100 cash distribution.

NEXT: Withdrawal behavior affected by allowing partial distributions