EBRI: Spending a Distribution Can Hurt

January 10, 2006 (PLANSPONSOR.com) - Nearly a quarter of those who took a lump-sum distribution from their plan in 2003 used the money for immediate consumption such as buying a home or starting a business, according to a new study.

The study by the Employee Benefit Research Institute (EBRI) found, on the other hand, that just under half of those taking such a distribution in 2003 ploughed at least part of the assets into another employer-based plan, an IRA or into an annuity. The overwhelming preference for rollovers was to an IRA, accounting for about 70% of the most recent lump-sum distributions that were rolled over. The next most popular choice, favored by about 13%, was to roll over a distribution to a plan at another job.

Based on the 16 million individuals had taken lump-sum distributions from retirement plans as of 2003, the average distribution, in 2003 dollars, was $30,072; the median (mid-point) amount was $8,118.

How big a difference depends on one’s rate of return. The average loss of retirement assets by individuals cashing out their distributions by the time they reach age 65 ranges from $24,138 (assuming a 3% annual rate of return), to $40,972 (assuming a 5% annual rate of return), to $179,483 (assuming a 10% annual rate of return), the study said. “Despite these numbers being fairly small -except for the high-rate return value- these amounts could certainly make a difference in many individuals’ retirements,” wrote author Craig Copeland, senior EBRI research associate.

Those who didn’t roll over paid the price, the study said. “A significantly higher percentage of those who spent their lump-sum distributions reported their standard of living (in retirement) as being somewhat or much worse than was reported by those who rolled over their entire distribution (24.5% compared with 16.2%),” the study reported.

More Statistics

Other findings from the EBRI study include:

  • As of 2003, about two-thirds of wage and salary workers age 16 or older worked for an employer or union that sponsored any type of retirement plan for its employees or members. Almost 51% of wage and salary workers participated in a plan, with nearly 47% being entitled to a benefit or eligible to receive a lump-sum distribution from a plan if they left their job.
  • When workers who are participating in a current or previous job’s plan are added to those who own an IRA or Keogh, the proportion of all workers who had some type of retirement plan in 2003 was just over 55%. Among workers ages 51-60, nearly 70% had some form of retirement plan, and individuals with 15 or more years of job tenure in a job had a 75% probability of having a plan.

The study is here .