At Distribution Time, What Do Participants Do?

January 9, 2014 ( –  Examining how participants decide to leave an employer’s plan after separating and when they begin taking distributions can help plan sponsors decide whether to use “to” or “through” target-date funds (TDFs).

As defined contribution (DC) plans have begun dominating the private-sector retirement plan landscape, plan sponsors and providers are increasingly interested in the distribution decisions of older participants when they stop working. These decisions can help address a key question, according to “Retirement Distribution Decisions Among DC Plan Participants,” a paper from the Vanguard Center for Retirement Research.

Should plan sponsors base the glide path of a TDF on an approach that takes the participant “to” or “through” retirement? The former would suggest a more conservative glide path, assuming assets are used immediately upon retirement. The latter points to an investment strategy that recognizes that assets are generally preserved for several years post-retirement.

“You lose your participant identifier when participants leave the plan, but we know that once [participant balances are] in the IRAs, they generally don’t come out until the required minimum distributions,” says Jean Young, senior research analyst at Vanguard’s Center for Retirement Research and a co-author of the paper.  “That’s part of the overall analysis,” Young tells PLANSPONSOR. “We looked at this large population of participants, and mostly they roll over to individual retirement accounts (IRAs). It’s not a matter of small or large balances, but a behavior that’s pretty consistent. People are not taking money out until the distribution is required.”

But the simple fact of withdrawing the money does not necessarily mean it’s being spent, Young says. Some of it is saved in a bank account or in a different vehicle instead of being consumed in rent, groceries or cars.

Since the assets are not being used for several years, the research shows, people have a longer time horizon. In order to preserve assets through retirement, the equity allocation is 50% at the year of retirement and between the ages of 65 and 72 it goes down to  a final equity allocation of 30% at seven years past the actual age of retirement. “You invest to retain assets longer,” Young says, “so that suggests a ‘through’ approach instead of a ‘to’ approach.”

Market Is Not a Motivator

The Great Recession and more recent financial market volatility appear to have had little impact on the distribution decisions made by retirement-age plan participants, according to the paper, which updates analysis from 2010, taking it through the end of 2012.

Young emphasizes that the research includes older participants who terminated service in 2008 and 2009, years marked by a global financial crisis and a severe decline in stock prices. Surprisingly, the behavior of retirement-age participants was similar to that of both earlier- and later-year groups. Charting in-plan behavior over the years 2004 through 2011, Vanguard found the participants in each year follow a startlingly similar curve.

“There is not much difference in plan-exiting behavior,” Young says. "Even through a variety of economic environments, the behaviors are remarkably similar.”  

Other findings from the paper include:

  • Preserving assets. Seven in 10 retirement-age participants (defined as those age 60 and older terminating from a DC plan) have preserved their savings in a tax-deferred account after five calendar years. In total, nine in 10 retirement dollars are preserved, either in an IRA or employer plan account.
  • Cash-out of smaller balances. The three in 10 retirement-age participants who cashed out from their employer plan over five years typically hold smaller balances. The average amount cashed out is approximately $20,000, whereas participants preserving assets have average balances ranging from $150,000 to $225,000, depending on the year of termination cohort.
  • In-plan behavior. 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. Only 10% of plans allow terminated participants to take ad hoc partial distributions. However, about 50% more participants and assets remain in the employer plan when ad hoc partial distributions are allowed.


Knowledge Gap?

Young says she finds it a little surprising that more individuals don’t stay in the plan and take advantage of the lower cost of investments negotiated by employers compared with the prices they pay as direct retail investors. Some people want to simplify their financial lives and consolidate accounts, she says, or some people do not understand the expense structure of how they pay for investments. “I guess it’s a knowledge gap,” she says.

The data in the analysis is from Vanguard’s DC recordkeeping clients over the period January 1, 2004, through December 31, 2012. Analysts examined the plan distribution behavior of 266,900 participants age 60 and older who terminated employment in calendar years 2004 through 2011. The average account balance of participants ranged from $106,800 to $149,400, depending on the year of termination. About half the participants had account balances less than $50,000, depending on the year of termination. Three in 10 retirement-age participants had worked for the plan sponsor fewer than 10 years, a factor affecting the number of smaller balances, since account balances rise with tenure. About 45% of retirement-age participants had 20 years or more of job tenure. These longer-tenured participants had average account balances of about $190,000.

“Retirement Distribution Decisions Among DC Plan Participants” can be downloaded from the Vanguard Center for Retirement Research website.