DC Participants Prefer Distribution Monthly

January 27, 2004 (PLANSPONSOR.com) - By the count of four-to-one, defined contribution plan participants would prefer to convert all or some of plan assets into a stream of lifetime income rather than taking a lump sum distribution.

Overall, 80% of plan participants polled prefer the monthly income stream, according to the latest release of information from Prudential Financial Inc’s Annual Retirement Perceptions Study.   This is due in large part, Prudential says, to the gradual accumulation of retirement assets spanning a career and the trepidation many workers feel about receiving a large wad of cash.

“For years, defined contribution plan participants are taught to accumulate retirement assets and build their nest eggs,” Scott Sleyster, president, Prudential Retirement said in a news release. “Yet during their working years, most people live on and manage their monthly expenses against their employment income. Since we found that most people relate to the need for an income stream in retirement, it would make sense for plan sponsors and providers to focus on how to help participants plan for and secure this income stream,” added Sleyster.

Prudential presented three scenarios of managing retirement assets and income:

  • converting all retirement assets to guaranteed lifetime income
  • receiving all retirement assets in a lump sum distribution
  • combination of a monthly income and a smaller lump sum.

Only 20% of the people survey would feel most comfortable taking all of their life savings solely in a lump sum distribution, while 41% prefer to convert all of their accumulated retirement guaranteed lifetime income. The other 39% would like to have both: a monthly income stream plus a smaller lump sum at their disposal for emergencies.

While the idea of converting retirement assets into income stream is appealing, participants may not be fully aware of the products available.   Questioned about how they plan to handle plan assets when they retire, nearly six in 10 participants indicated they would either leave the money in the plan or roll them over to an Individual Retirement Account (IRA) and just 11% would take all in cash. Remarkably, about 20% do not know what to do, even among those 50 to 64 years old who are close to retirement age.

Retirement Behaviors

Referring back to the earlier release of information about participant behaviors about retirement, Prudential said six out of 10 respondents expect to get most of their retirement income from a workplace retirement savings plan.   While just under half (46%) believe they have a good handle on how much they will need, they admit not having come to that figure via a formal numbers crunching. Meanwhile, 54% are setting aside the biggest chunk they can – but not necessarily as much as they should to reach their retirement goals (See  Survey: Social Security Holes Pushed Participants into Plans ).

Many respondents may be worried about aspects of their financial future, but that apparently has not propelled them into action in managing their retirement savings. According to the survey, fewer than a third have set formal retirement savings goals, more than half have their assets in four investment options or fewer and almost 70% did not change their investment allocation in the past year, despite the often turbulent down markets.