Figure Figure Figure 1 7 5 Figure 3 By Debt T-178 Retirement or Job Change? The Outcomes Are Different Di Distr stri ibuti buti Distribution of on on of of DC* DC* Pl Pl DC* an an A Asset sset Plan Di Di Asset sposi sposi Disposition When t tiion When on When Respondents Respondents Disposition of DC Accounts: Who Rolls Over into an IRA? Distribution of DC* Plan Asset Disposition When Respondents ? The decision to rollover those DC distributions to an IRA is the mirror image of the Figure 5 shows how the decisions varied by the level of debt (credit card balances, medical debts, life Retired/Left Respondents Reti Retired/Left Empl Employ roy e er d/ er , Left by , by Lev Empl Labor el of oy For e Debt (2010 r, by ce Status Gender $s) The respondents’ decisions changed if they retired rather than remained active in the labor force after Retired/Left Employer, by Wage Income (2010 $s) 2 40% 35% characteristics influencing cash withdrawals. Rollover decisions increased with higher account Who Leaves Money in the Plan and insurance policy loans, loans from relatives, etc. ) held by the household. Who There were two general trends: Withdraws 45% 40% leaving their current employment. Figure 1 shows the differences in DC plan outcomes: Retirees were 42.8% balance, higher income, previous ownership of an IRA account, and greater financial wealth. First, cash outs increased with debt. For example, 12.4 percent of respondents with no debt had cashed less likely to cash out, to roll it over to an IRA, or to leave it in the plan. But as expected, as r 31.1%etirees they 35% Cash? 35% They also declined with higher debt. out , while 2 40% 7.3 percent of those with debt between $3,000–$10,000 did so, as did 23.8 percent of those 30% were much more likely to receive benefits from these plans. Among those who continued to be in the Male Female ERISA Advisory Council with debt of $10,000 or higher. Second, IRA rollovers decreased as debt levels increased: 27.7 percent of 30% 27.1% labor force, leaving money in the prior plan was the most common outcome. More than 1 in 3 (34.8 34.8% 30% 25.9% There is, however, no clear trend with respect to th 35% 25.8% e above-mentioned financial variables and the decision those with no debt decided to roll over their DC account balance to an IRA at the time of job separation, By Sudipto Banerjee, Ph.D. 25.3% percent) of those who still remained in the labor force left their money in the plan, compared with 27.0 25% 25% to leave those DC balances in the prior employer plans. This suggests that there may be behavioral compared with 11.4 percent of those with debt of $10,000 or more. There was no1 clear trend with regard Research Associate, Employee Benefit Research Institute (EBRI) 25% Still in labor force percent who rolled over the 22.6% iU.S. Department o r money to an IRA and 18.4 percent who cashed out. f Labor 30% factors, such as inertia, driving what might be seen as a “non-decision.” It may also be the case that to debt and money left in the plan. Retired from last job 27.0% 20% 20% individuals are deferring the decision until they need the money. 20% By Account Balance 18.1% 25% By Financial Wealth 15% Figure 2 sho Introduction ws how the disposition of DC accounts varied by the amount left in the plan (in 2010 dollars) 21.5% 15% Hearing on: 15.4% In terms of dem Considering the im ographic ch pact of non-housing aracteristics, asset no signifi s (excludi cantng IRA asset difference was found bet s) on the decisions with regard to DC ween men and women in at the time of separation from the employer. For a large part of the sample (623 observations), the account 15 20 % % It is well known that the private retire 18.4% ment asset landscape in the United States has shifted from an 3 10% terms of their DC account outcome choices. Married or partnered individuals were less likely to withdraw accounts, Figure 6 shows how the decisions varied w 17.2% ith the level of financial assets (in 2010 dollars). 10% balance was unknown, and the majority of this group were receiving benefits, but there were some clear emphasis on defined benefit (DB) (pension) plans, to one where defined contribution (DC) plan designs their assets The trends were si and m 15.1% o m re likel ilar to other financial variabl y to roll over them into an es. First, the tendency IRA than singles, but the difference to choose cash out declined s were small. 14.2% trends. First, t 15% he percentage of workers cashing out decreased as the account balance increased. For 5% (primarily the 401(k)) dominate (Olsen and VanDerhei, 1997; Poterba, Venti, and Wise, 2007). Along 10% 5% steadily with financial wealth. For example, 32.1 percent of those with zero or negative financial wealth LIFETIME PARTICIPATION IN PLANS accounts with a balance of less than $5,000, the cash-out rate was 46.1 percent, compared with 9.6 with this shift in design, individual workers now carry a greater responsibility of managing their cashed out their DC account balance, but only 8.7 percent of those with financial wealth of $80,000 or References 0% 10% percent for accounts with a balance of $100,000 or higher. On the other hand, the choice to rollover to an Receiving 0% retirement savings. This requires making decisions which could seriously affect their retirement security. Converted Receiving more did so. Second, the tendency to rollover to an IRA increased steadily with financial wealth. While Withdrew the Rolled Over to Transferred to Installments/T Receiving 5% Converted Left in the Plan to/Purchased Lost Benefits IRA increased steadily Copeland, Craig. “Lump-S wit um h Di account bal stributions a at nce: Only Job Change, 13 Di .7 percent of stributions Thr those with an account balance of less ough 2012.” EBRI Notes, Vol. 34, no. Withdrew the Rolled Over to Left in the Transferred to Installments/ Receiving Money an IRA New Employer ook Irregular Benefits Now to/Purchased Lost Benefits Annuity 14.8 percent of those with zero or negative financial wealth IRA chose to roll over their balance, 30.5 5% Money an IRA Plan New Employer Took Irregular Benefits Now Payments 11 (Employee Benefit Research Institute, November 2013) 1.8% than $5,000 rolled over their assets to an IRA, co 1.7% mpar Aed with 47.0 nnuity percent of those with an account 1.4% A poor decision— for example, withdrawing the money prior to age 59-½, incurring a 10 Payments percent penalty 0.9% 0.8% 0.9% 1.8% 0.7% 1.9% No Debt 12.4% 27.7% 25.5% 0.6% 0.7% 0.3% 0.7% 2.0% 30.8% percent of those with financial wealth of $80,000 or 1.2% more chose to do so. The percentage of respondents 1.1% 1.3% 1.3% balance of $100,000 or <25,000 higher. There was, however, 30.5% 18.0% 27.1% little difference between the percentage of workers 0.3% 0.3%1.0% 0.8% 22.2% 0% <3,000 23.7% 20.7% 33.6% 1.1% 0.4% 1.9% 18.7% in addition to incom . “Lump-Sum Distribut e tax on that distribution—coul ions at Job Change.” June 17, 2014 EBRI N d r oe tes, duce their retirem Vol. 30, no. 1 (Em ent asset ployee Ben s significantly. IRAs in efit Research Institute, leaving m 0% oney in the plan did not vary much by financial wealth. >=25,000 & <50,000 20.9% 25.2% 26.9% 0.5% 1.4% 0.2% 1.4% 23.6% Withdrew the Rolled Over to an Left in the Plan Converted Transferred to New Lost Benefits Receiving Receiving Benefits >=3,000 & <10,000 who left their assets in the plan by 27.3% 20 account balance .4% 18.7% (between 31.2 percent and 32.0 percent) for account 3.8% 0.2% 0.8% 28.8% Withdrew the Rolled Over to an Left in the Plan Converted Transferred to Lost Benefits Receiving Receiving Benefits January 2009) some cases offer a larger se Money IRAt of investment altern to/Purch atives than individual workplace retire ased Employer Installments/Tookment plans, but Now >=50,000 & <75,000 11.3% 19.1% 26.4% 1.9% 0.6% 1.6% 3.1% 36.0% Money IRA to/Purchased New Employer Installments/Took Now >=10,000 23.8% 11.4% 28.7% 1.7% 1.5% 2.1% 0.4% 30.3% Annuity Irregular Payments balances less than $100,000, compared with 25.4 percent for accounts with balances higher than C5320 Room 6 at the U.S. Department of Labor >=75,000 Annuity Irregular Payments 9.8% 29.7% 20.6% 1.7% 0.8% 0.4% 37.1% may also bring with them higher investment and/or administrative costs. Consequently, it is of great Unknown 9.4% 30.4% 20.9% 1.5% 3.3% 0.6% 1.8% 32.2% . “Retirement Plan Participation and Retirees’ Perception of Their Standard of Living.” EBRI Issue Brief, no. Demographic Factors Unknown 11.1% 26.8% 26.9% 2.1% 0.8% 1.9% 2.6% 27.9% $100,000. importance that people make these decisions wisely. Source: 289 Employ (Emp ee lo Benefit yee Ben Research efit Research In Institute estimates from stitu the Hte, Jan ealth and u Retirement ary 2006 Study ) (HRS). Source: Employee Benefit Research Institute estimates from the Health and Retirement Study (HRS). Source: Source: Employ Employee ee Benefit Benefit R Research esearch Institute Institute estimates estimates from from the H the Health ealth and and R Retirement etirement Study Study (H (HR RS S). ). Gender * Defined contribution. * Defined contribution. * * D Defined efined contribution. contribution. By Income Hurd, Michael and Constantijn Panis. “The Choice to Cash Out Pension Rights at Job Change or Figure 7 shows there was very little separation between men and women in the distribution of DC account Although the disposition of accounts is an important part of the DC system, the literature on this subject is Retirement.” Journal of Public Economics, Volume 90 (2006), pp. 2213-2227 Figure 3 shows the distribution of DC account disposition by wage income (in 2010 dollars) at the time of outcomes. For both men and women, receiving benefits was the most common outcome (31.1 percent for relatively small (Copeland 2013, 2009, 2006; Sebelhaus, Bogdan and Holden, 2008). My testimony will separation from the employer. There were some trends similar to those illustrated in Figure 2. First, cash men and 27.1 percent for women), and an almost identical proportion of men and women (25.8 percent Olsen, Kelly, and Jack VanDerhei. “Defined Contribution Plan Dominance Grows Across Sectors and Employer focus on a study recently published by EBRI which documents the outcome of DC plans using a Statement for the Record outs decreased with income: For example, 30.5 percent of those with annual wage income of less than and 25.3 percent for men and women, respectively) left the money in the plan. Cash outs and IRA Sizes, While Mega Defined Benefit Plans Remain Strong: Where We Are and Where We Are Going.” nationally representative survey (described below) and analyzing how the disposition decisions of older by Figure Figure 86 $25,000 cashed out, compared with 9.8 percent of those Figure 4 with wage income of over $75,000. Second, IRA rollovers were slightl EBRI Issue Brief, y hino gh . 19 er am 0, (Em ong women than men. ployee Benefit Figure 2 Research Institute, October 1997) workers correlate with a number of demographic and financial variables. Distributi Distribution of on of DC* Sudipto Banerjee, Ph.D. Pl DC* an Asset Plan Di Asset sposi Disposition When tion When Respondents Distribution Distribution of DC* Plan of DC* Plan Asset Disposition Asset Disposition When Respondents When rollovers increased with income: 18 percent with annual wage income less than $25,000 rolled over their Poterba, James, Steven Venti, and David A. Wise. “The Changing Landscape of Pensions in the United States,” Retired/Left Employ Respondents Reti er, by re Financ d/Left ial W Emplealth oyer, (IRA by M Excluded, 2010 arital Status $s) Research Associate Marital Status Retired/Left Employ Respondents Retired/Left er, by A Employ ccount er Balance , by Existing (2010 IRA $s) assets to an IRA, while 29.7 percent with wage income of $75,000 or above did so. Third, the decision to NBER Working Paper 13381, September 2007 (Cambridge, MA). 35% 60% Data 40% Employee Benefit Research Institute (EBRI) leave Previous rese m 40% oney in arch has shown that marri the current plan did not v ed people ar ary significantly with inco e generally in a better financial position an me: For the three income groups d thus Sabelhaus, John, Michael Bogdan, and Sarah Holden, “Defined Contribution Plans Distribution Choices at The data for this analysis come from the Health and Retirement Study (HRS), a study of a nationally below $75, better prepared for retirement than sin 000, the percentage of respondents who le gles. Figure 8 sh ft m ows the DC account outco oney in the plan ranged from mes for singles and 27.1 percent to 35% Single 29.6% Retiremen50 t: A % Survey of Employees Retiring Between 2002 and 2007,” Investment Company Institute representative sample of U.S. households with individuals age 50 and over. It is a biennial longitudinal 30% “Disposition of DC Accounts: Who Rolls Over into an IRA? 26.4 individuals married or living with percent, but for individuals with inco a partner, and while married/partn me above $75,000 this decreased to 20.6 percent. ered people had lower cash out rates 35% 33.7% 28.6% Married or Partnered Research Series, December 5, 2008 (Investment Company Institute, Fall 2008), 30% survey with waves in even-num Who Leaves Money in th bered years, begi e Plan and nning in 199 Who Withdraws Cash?” 2. Data from 2008 and 2010 were used for and higher IRA rollover rates than singles, the differences were small. Roughly 1 in 5 (19.8 percent) 25.8% 25.5% By Ownershi this study and are co p of an Existing IRA 40%mbined and used as a single cross-section. In both years, HRS had asked the 29.5% singles cashed out their DC account balance, co 24.6% mpared with 15.3 percent of respondents living in couple 30% 28.9% 25% 25% Already Had an IRA Notes following question: “When you retired/le 27.1% ft the employer, what did you do with the plan?” 22.9% It m household ight be expected that those who already , and IRA rollover rates for singles and marr own an IRied/partnered were 22.9 pe A should find it easier, or are rcent and 24.6 more inclin percent, ed to roll 1 Had No IRA Previously 24.8% ? Withdrew the money/received cash settlement/lump sum. over their DC account balance to an IRA. Figure 4 s Copeland (2013) 20 rep % orted that between 2010 and 2012, a hows that was, i mong workers 21 ndeed, the case: Of those already and older 21.9 percent cashed out t heir respectively. There was 30% almost no difference in the percentage of respondents opting to leave their DC 25% 19.8% account 20% balances at the time of job separation. For those between 51 and 60, 61 and 64 and 65 or older the numbers owning an IR ? Rolled over i A, 33.7 n percent rolled o to IRA. ver their DC balance into an IRA, compared with 19.3 percent of account in their current plans: 25.8 percent for singles chose to do so compared with 25.5 percent for 21.4% 15% were 17.0 percent, 5.4 percent and 5,5 percent respectively. those who did not already own an IRA. Also, IRA owners were much less likely to cash out, as 21.4 married/partn ? Left in the pl ered. an. 19.3% 20% 20% 15.3% 2 percent of those without an existing IRA cashed out, compared with 7.2 percent of IRA owners. Deb ?t inform Converted to/ ation10 is co % llected purchased annuit biennially. So y. , it is not possible to observe the level of debt for respondents who 15% changed jobs between survey years. For such cases, the average household debt from the adjoining survey years was ? Transferred to new employer. Conclusion 15% 10% 5% use The difference between IRA owners (27.1 percent) and d. those with no existing IRA (24.8 percent) in terms ? Lost benefits. A worker’s use of his or her DC retirement account balances at the point of separation from a previous 10% of the choice to leave the m 3 oney in the plan was small. So, for the group that left the money in the current ? Received/ receiving installments/took irregular payments. Like 10 de % bt, financial wealth in 0% formation is also collected biennially. The last observed level of financial wealth, employer is one of the m 0% ost important decisions a DC plan participant faces regarding their future Receiving Receiving plan, neither income, account balance, nor already ow Co ning an IRA appeared to influence that decision. nverted The views expressed in this statement ar 7.2% e solely those of Sudipto Banerjee and should not be attributed to Converted before the respondent mW ade t ithdrew t he hDC e Ro pl lled an Ovde er ci to sion, is used here. Transferred to Installments/T Receiving ? Receiving benefits now. Withdrew the Rolled Over to Left in the Transferred to Installments/ Receiving retirement security. This analysis indicates the following: Left in the Plan to/Purchased Lost Benefits to/Purchased Lost Benefits Money an IRA New Employer ook Irregular Benefits Now This indicates behavioral factors rather than financial factors could be driving some of these decisions, Money an IRA Plan New Employer Took Irregular Benefits Now the Em5% ployee Benefit Research Institute (EBRI), the EBRI Education and Resear Annuity ch Fund, any of its Annuity 5% Payments Payments though it might also be a non-decision—a simple case of inertia, leaving the money where it already is, ? Leaving the money in the prior plan was the most common outcome for those who rem 2.1% ain in the program <= s, officers, trustees, sponsors, or 0 32.1% 14.8% other st 27.7% aff. The Em 1.3% ploy0ee Benefit Research Institute is a .4% 3.0% 2.1% 18.7% 1.9% <5,000 46.1% 13.7% 32.0% 0.8% 2.0% 5.4% In 2010, an additional option, “expecting future benefits” was added and 2.5 percent of respondents chose 1.5% 1.2% 1.2% 1.1% 1.1% 1.1% 0.9% 1.0% 0.9% 0.7% >0 & <=15,000 20.1% 23.0% 26.0% 1.4 0.5% % 0.4% 1.0% 0.3% 0.2% 0.5% 1.9% 26.5% rather than making an affirmative choice >labor force after leaving a job. =5,000 & <25,000 41.7% 23.7% , or perhap 31.5% s de0. ferring any 3% 1.4% decision until they need the m 1.5% oney. nonprofit, nonpartisan, education and research organization established in Washington, DC, in 1978. this option. For comparison, this analysis groups them with the “left-in-plan” category. There were 654 0% 0% >15,000 & <=80,000 11.4% 23.2% 27.2% 1.3% 0.3% 0.9% 35.7% >=25,000 & <100,000 15.6% 38.3% 31.2% 2.3% 2.1% 0.4% 0.4% 9.9% Wi Withdre thdrew w the the R Roll olled ed Ov Over to er to an an Le Le ft in ft in the the Plan Plan CC onv onv erte erte dd Tran Tran sfe sfe rred rred to to New Lo Lo st Be st Be nefi nefi tsts Rec Rec eiv eiv ing ing Rec Rec eiveiv ing ing Bene Bene fitsfits EBRI does not take polic ? A decision to take cash out of accu y positions, nor does it lob mulated savings by, advocate specific policy reco declined with higher account mmendations, or balances, higher >80,000 8.7% 30.5% 24.1% 0.7% 0.7% 0.3% 1.4% 33.7% responses in 2008 and 726 responses in 2010, resulting in a total sample size of 1,380. HRS-provided >=100,000 9.6% 47.0% 25.4% 2.1% 1.1% 2.0% 12.9% Money IRA to/Purchased New Employer Installments/Took Now Money IRA to/Purchased Employer Installments/Took Now Unknown 9.4% 30.4% 20.9% Ann Ann uu ity ity 1.5% 3.3% 0. Ir6% rIe rg re ug lar ul P ar a P ym aym en 1. en ts8% ts 32.2% receive feder Un incomes, existing ownershi knownal funding. p of an IRA, and higher financial wealth. The decision to take a cash 4.8% 13.0% 20.0% 1.0% 0.3% 1.5% 2.3% 57.1% individual sample weights were used for the analysis. out also rose with debt levels. Source: Employee Benefit Research Institute estimates from the Health and Retirement Study (HRS). th Source: Employee Benefit Research Institute estimates from the Health and Retirement Study (HRS). Source: Employee Benefit Research Institute estimates from the Health and Retirement Study (HRS). * D Source: efined Employ contribution. E ee Benefit BRI • 1100 13 Research Institute St. NW #800 • estimates from the H Wealth ashington, and Retirement DC 20005 • Study (HR S( ).202) 659-0670 • www.ebri.org * Defined contribution. * D * D efined efined contribution. contribution. EBRI T-1 EBRI T-1 EBRI T-1 EBRI T-178 78 78 78 ERISA Advisory ERISA Advisory ERISA Advisory ERISA Advisory Council, June 17, 2014 Council, June 17, 2014 Council, June 17, 2014 Council, June 17, 2014 P P P Paaaaggggeeee 2158 EBRI EBRI EBRI EBRI T-178 T-178 T-178 T-178 ERISA ERISA ERISA ERISA Advisory Advisory Advisory Advisory Council, Council, Council, Council, June June June June 17, 17, 17, 17, 20 20 20 20 4 7 8 5