Statement on Pension Portability and Preservation: Summary Hearing on Trends and Issues Related to Pension and Welfare Benefit Plans T T_b abl lT_b 6 9 1 2l0 4 Tabl_ ._ RefGr_nce_ Tablo TT 3 __ bl bla (o oontinuod) T 4abl (ee ontinu 6 od) T-7_ Tabla T_bl 2_ (e_ ent(c inu on sd tin )ued) Table 6 (eontinuod) Before the House Select Committee on Aging Subcommittee on Retirement Income and IPermitting ntroductionOnly .......................................................................................................... Defined Contribution Plans_Vested benefit values under defined 2 a would distributions. substantially wo recipients separated purposes re e from negative m qui simple ul pld oy r39 em hav lose e Defined Preretirement C Mandating r- e per hypothetical h impact s e n reporting of anges vested po ts, 77 cfa ent n higher the lsor len percent While lacontribution ck on to e following iw n d from the orkers defined of indicated 43 benefits the plan model these erosion iAdjustment of n percent. 15 fla la sthe w t not w analysis, p io benefit of distributions e ould retirement n than pertai rcent that value of yet the 12 adj face lump-sum n their one receiving effects ust of plan ing to Moreover, of options m Deferred 5 increased his holding ent plans t most sponsorship, percent, ooften of or preretire followi values benefits job (1) her recent do -Annuity a four represent changing labor and ln an benefit not arge g m through .d jobs lump ent provide prere (2) encouraging the costs, Federal proportion Values of for lu w on proportion sum tfully m irem ill in consumption, retirement p-su and the c for be reasing pensions e amounted for portable nt value m considered specified employment of more Inflation job distributions the suof tenure ffering by change, employers similarly most benefits, vested to loss spending deferred or ltax-qualified ess or over any recent Pay ofbenefits and wage do may than tax loss 40 to the not opt $48 lthey sargely ervebi rell to cCare of ion eived red oto lder, uc must it, $99 e em part-time and be bi plllion oy how taken ers in they workers, ' c in inonstant ce considering used ntives who it.1988 to Some may sthe pon dohave findings ls lars. potential or plans. had The are impact much average summarized Perhap higher ofsportability amount more earnings below impotentially portantly, .and For earlier inin INTRODUCTION Alternative Approaches to Portability and Preservation Reform Hypothetical Benefit Accumulation under a Defined Benefit Pension Plan for Worker Sourc Propo e: Employe rtionof eBen Prere efitt Rlreme esearch nEmployment, lLu Inst mp itut -Seu tabulations m ReJuly cipoie f27, th nts e May R1990 epor 1988 tlng Curr Var ent ious Population Uses Survey forAny of their Proportion of Preretirement Lump Recipients -Sum Recipients Reporting Aggregate Various Amount Uses for A All verage of their Most DiDistribution stribution ofofAggr Preretirem egate Most ent Lump-Sum Recent Proportion Lump-Sum Proportion Recipients, of R of Amounts ecipients Recipients Aggregate Usin R Using e_ clAn eiv Amount y All eo d, fof Th Their Pot eir ae Lof ntial SD LSD Most for: for: theirProportion careers. 1 4 of Aggregate Amount Proa portion of Most of AcjR gre ec ce jat nte Lump-Sum Preretirem Amounts ent LSDs Report Us edly ed Us Entirely ed Entirely forfor: annuities adjust levels benefits might and suffer. therefore for inflation are in not between subject separation to the sameand type commencement of inflation erosion of benefit as defined $2,500. preretirement plans preservation cash-out financial would available deferral, available contribution distributions instead Increases under have increased a in have for Just defined which payment --Under savings; opportunities. evidence atdefined declined retirement plans policy received 7distributions percent employee the benefit of are options a suggests reforms contribution popularity defined the from not by bears plan. had At penalty today's participation 59 subject (1) rather least directed received that benefit a percent The of through weaker plans. tax-favored some tax, workers workers than model to plan, at inflation to $20,000 and is of any (4) positive rolling And, 41 compares /voluntary or a often these were will one percent. disparity poor because uses. erosion them or be fail relationship features or received more. investment referred more IRAs, the to and into between Only due defined preserve monthly employee However, of a are first very to 3tax these to to percent job chara established results contribution actual as the recently. qualified annuity these mobility. goals. financial c age contributions those teristic of can retirement benefits' at benefits covered account receiving erode under In In which plans Because of savings; particular, May nearly full achieved benefits workers potential ERISA are the typically at 1988, value less the aallto in years, comparison, based How Portability all on dollar the real figures and present Preservation represent value ofconstant Affect the annuity Retirement 1988 stream dollars. Benefit available Levels at retirement. ................. 3If employeebenefitsupplement(CPS EBS). Mo Kaeplng st ReceOne nt Recent LS Job D; by forLSDs, S 30 ele Years ct byedDem Svs. eInsuranc lected og Work raph e De elc r m Holding ographic and Econo Three and mlc10 Economic Va Year riabJobs les; Variables, Civili for 30 Discr anW Years or eker Nondis- s Aged Accumulations Recipient at Age 65, and Associat Tax- Percentage ed Average Amounts, Discre- by Percentage Select Nondis- ed Economic Amount per Mixed Chart 1- Lump-Sum Vesting Among Full-Time Private, Public policy interest in portability Tax- and preservation Discre- of retirement Nondis- benefits Mixed Recent There LSDs are Reseveral celved, steps and Average between Amount employment a Received, and pension by Amount receipt of in LSD, retirement. Year of Selected Purposes, b by Selected Demographic and Economic Variables, Civilian Workers Joseph S. Piacentini, Research Associate, Employee Benefit Research Institute (EBRI) 16 or Over, May 1988 Allen, Steven; Robert Clark; and Ann (constant McDermed. dollars) "The Pension Cost of Changing Jobs." aAggr until e aretirement. gate nd and Demographic averag Received eamounts Variabl Civilian LSD may es,be Workers qualified Civilian und annuity erstat Aged Work ed.Whil Tax- er 16 se8 or Ag .5 e million Over, d 16workers May or tionary Ov 1988 e ar r,ecretionary a estimated May 1988 tionary- to have crconsump- etion- and payments. benefit pay Recelpt, retirement hypothetical plans and.Informal Sbenefits e Under lected one-job reports aCharact as defined career lump from erlstlcs benefits sums, contribution public-sector of without can Recipients; plan, result preservation pension contributions--rather even Civilian when experts such Workers all a confirm accrued trend Aged than could that benefits benefit 16 this erode orare over, would than assess moderate 41 worker options retirement by Characteristics expected 1974, required, retirement a percent $2,500 worker fa and The received Finally, fully (1) ce restricting retirement nominal plans, marketed income. losses average through of who the accounted lump-sum any the potential holds including R greater interest 5 shift e access value (6) distribution size c heavily eTherefore, iv for one and e from of In d of recipients for than LSD those rate 9 Thousands to job lump-sum vested (8) by percent retirement advance-funded the 19 (8.5 for will than banks sponsored without quali funds percent 30 account indicated be b percent). does of fdistributions years iand eclassified of the might d income preservation, .total the other balances total by Hay with cthat employer-sponsored make amount The private /gains Huggins amount institutions those as their appears effect some is $ savings Billions a originally c not portable of c ompanies, most hievable received, also of a employees reduced to worker b following spending broadly recent tionary reported have benefits paid of by while plans by when who total changed distribution additional defined; out. cr the more state preretirement that c etionary holds those employees to may extension This an reluctant or iflittle Recipient final not and three local expanded receiving reform, occurs was over of 10- to d consump- each plan provided Vesting benefits Requirements as an annuity ............................................................................... stream beginning at retirement, the 4 Sector Aged Workers 16 or Ov , er, May May 1988 1988(dollar amounts reported in constant 1988 dollars) appears NBER Working to be growing, Paper no• in2935. large Cambridge, part owing to MA: conNational cern about Bureau retirement of Economic income Research, security. Fi Recipient Interpreting receiv rst, a edwo LSDs rke the arsmust oReceived Data f May from wo 1988, Prior rLSD k data fJob or a on n the emplo financial o amount r reyte ire r - Financial o th fqu th at a elified o most ffers re Finan c aent pl-a LSD n. consump- re Next, ceived the are consump- Con w availabl -orker Consump- ce o fm or n-ust arytion con- and 1988 Earnings May 1988 (dollar amounts reported In constant 1988 dollars) Workers with long tenure at one job may receive larger retirement benefits than workers with Recipient fromPriorJob financial Financial consump- consump- Consump- tion and- Accrued 1989. received after 1984. Erosion Due to Inflation ........................................................................... Proportionof RecipientsUsincjAny of TheirLSDfor: 4 government distributions fully payments--are retirement pay-as-you-go Recipient only7.1 vested million income entities, if from ofthe Social specified th from ese final-pay values security. Prior individuals. and Security according Job by ofdefined the deferred There system federal to fbenefit ore, a ment- annuities might formula the government. aggr plans financial adversely e or gat from rule, rather eamount jobs and cial affect than o terminated benefit f most rolling national rec amounts ent them prior sump- LSD savings sover to depend receiv retirement sump- (Davis, at ed a on sump- options practi employers change $20,000 contribute because, participate time. IRA $1-$4,999 deduction ceThe The jobs, (7) is or although virtually to gave or average disparity more and retirement these redu eligibility credit (9) accounted colder unheard e benefits distribution through Aggregate between the for to income recipients amount covered all of are for (11) A 345 actual among workers m received generally 48 ount security. they will are service percent. aretirement state and be contribute. in likely after % considered regarded 1981, In 5% at and Distribution to contrast, previous 1984 benefits local have have Therefore, as amounted government consumption grown received fully lump-sum employers, and $3.0 portable. hypothetical insuch to larger popularity .pension recipients approximately all 17 restri 8% distributions Therefore, portability cbenefits tions plans aswho a $10,500 vehicle as might $8,300 if losses save that from all well. discrepancy it year is necessary jobs. Both would to are consider range assumed from who to 46 willretire percent bear Proportion immediately thefor costs. oa f Recipients typical Because following male Usin_ plan production 30 Allof sponsorship years Their of Lump-Sum worker totaland service. to Distribution 43 for: Characteristics Percentage (thousands) b savingsc savincjsd Savincjse tion f tiong tionh savincjs identical Characteristics pension coverage (billions) who cchange savin Proportion jobs gsdmore sa ofvings A_re_a frequently. e te Savin Lump-Sum cjs Retirement f tiong Amounts benefit Reportedly tionh gains Used tion from I Entirely savings for: Lapses in portability and preservation insuran may ce limit the ability of mobile workers Dis tocre Nondis- becomeThe an a May ctive1988 partic CPS ipantEBS and Monthly a cannot ccrue Annuity a provide bene Current fitaunde comprehensive Value r the pl Current an. Whethe tally Value of rpreretirement aTotal ccrued Monthly When: excludesthe LSDsreceivedbythe remaining Tax-1.4 millionworkers,leadingto Discre- an understat Nondis- ement of Mixed $5,000-$9,999 616 9 1.8 5 3,300 Characteristics (thousands) a IRARecipients plan savincjsb savin Aggregate {]sc Savings Amount d tion e Average tion e tione Workers 1988 Earnings Tax- Discre- Nondis- Mixed long 1989) tenure . are the result of vesting, Credited adjustment for Most of of deferred Credit for annuity of Credit amounts for for pay Annuity increases, contributions are longer-tenure for their enhance might similar tax-favored eroded entire be interest Require retirement achieved by portable and jobs, inflation. rate Lump lump-sum investment following the income would benefit -Sum younger be roll Cash security a on returns one-job smaller overs. a -Outs recipients tax-deferred in .. Just career some From Vested Because 3 have Defined instances is percent participants basis sometimes longer final-pay Benefit until of and before lump-sum retirement plans characterized who erode Plans, retirement leave are it and in recipients back-loaded, and others. their Mandate as achieve to jobs a earn who Their the percent in The employer-sponsored might constant workers 80 be Men In In .for eliminated. May May aaccounted 1988 are typical Cash-Out 1988, 1988, assumed dollars, plans male The 11 one-fourth for percent Opportunity same professional to were compared slightly participate would defined ofof more lump-sum annuity .............................................................................. all generally with Proportion inthroughout contribution full-time than the $6,700 financial Tax one-half recipients be of- all private-sector true their for vested plans, sector of 1980-1984, ifcareers indicated all workers all one plans preretirement or source female in workers were that a$7,700 defined they of defined professional reported disparity lump-sum placed for benefit tionary 1975- at -5 in cretion- sometimes aggregateamounts plan participation received. However, are voluntary, if nosystematic reforms relationship that increase existsbetw plan eenthe costs amount to of 1988 $10,000-$14,999 Earnings 954 13 3.0 8 3,600 Received LSD qualified tionary cretionary consump- Recipient $1-$9,999 $4.8 25%Percentage 58% 74% 12% Percentage 4% Amount 17%per 9% The Vesting Effe Requirements ct of Cash-Out Opportunities on Retirement Income Andrews, achieve inEmily come S. supplementation Received The Changing LSD from qualified Profile em of ployer Pensions -sponsored in America. plans tionary Washington, in retirement cretionary DC: . Some consump- bene lumpfisums ts willreceived eventuallover y transl theate past into several retirement years. income First, depends only individuals on twoworking additiona in l May Pay in Constant Recent 10 Years First 10 Years Second 10 Years Payable at and lack of cash-out Ropportunities. eceivedLSD or retire- qualified Finan- Con- con- ary con- LSD receivedandwhetheror notthe amountis reported,distributions and averageswillnotbe $15,000-$19,999 $1-$9,999 961 1,113 6% 1528% 54% 4.7 26% 13 9% 5,100 36% 9% 1988 Recipient Earnings 70- from PriorJob financial Financial consump- consump- Consump- tion and Recipient $10,000-$14,999 Rec'd 3.0 Aae 10 65 1b 25 Aae 65 2c56 A17 veraae Amount 15 a When: 32 11 plan received Recipient Characteristics at the their final distribution employer from Prior InJob prior Thousands (fromto financial which 1970 b of the reported total Financial worker c any retires) $ Billions tax-favored consump- b wouldof contribute total savings; consump- c in Recipient Consump- d tion and- contribution typically investment between "portability Preservation 1979, least reasonable Employee some $7,200 While Short receive multiple-job Benefit loss" returns --Plan investment of plans; of restricting their for government their that only on Research 1970-1974, most sponsors affects account and the returns losses access recent amount hypothetical subsidies, workers Insititute, could balances due can distribution to and reto be c preretirement realize eived. who failure $6,600 one-job required there as 1985. immediate change retirement in As are toan for benefit to vest shown two IRA distributions cash jobs. 1960-1969. would basic lump income (table in levels out table However, sums. approaches remain. deferred 4). would gains. 3, might More aAs recipient a be In annuity long enhance large either than to eliminated eliminating as proportion values 2 aged case, investment percent . 25- in This the the of sponsors plan current the recipients At Ye retail ar that The eligibility sector provides and but Effect /or reported . participants YIf to e of annual ar benefits Job re 1 D creceiving eive ollars Mobility benefits instead may a lump-sum of more on have equal Service are Deferred than unintended cashed to distribution 1two-thirds .5Annuity percent of out Service negative on Values of separation from of the final effects a ....................................... total of pay retirement Service from amount times on retirement service years .plan The Retir and of at average ement income their rolled 6 a Recipient fromPriorJob ment- financial cial sump- sump- sump- Conclusion affected. $10,000-$14,999 (Withoutevidence 954 of the natureo 5f sucha relationship, 19 52 the effect on 31 estimated 11averages 42 is 4 $20,000-$24,999 $1-$9,999 961 1,045 6% 1% 14 7% 32%4.6 63% 13 45% 35% 5,000 1% policymakers Preservation have expressed of portable con retirement cern that benefits this could is undermine becoming central retirement to the income st 1988 e $15,000-$19,999 ps: were Both portability surveyed. public-and and Second, pre 4.7 private-sector servatio approximately n. 24 Portability employer-sponsored 411 million refers 77 workers to a plans wor 11 k reporting er's typically ability 5 having impose to carry 18 5 Total 8,478 100% $48.1 100% $6,800 Characteristics (thousands)b savingsc savincjs d Savings e tionf tiong tionh savings Current Chara levels cteristics of job mobility $ Bill. and % vesting $ Bill. delays % $ result Bill. % in onlyRec'd small retirement Ave 65 lb AV benefit e 652 c losses Characteristics (billions) c savings d savincjs e Savingsf tiong tionh tioni savings 60- ambiguous.) $15,000-$19,999 $10,000--$14, Inadd 999ition,in 1,113 954 the May 6 1988CPS 11 2EBS public 268 usedata 62 24base, all 22 56 LSDs reported 469 to be3432 1 5 Cha $25,000-$29,999 racteristics /thousands)a I818 RA plan 11savingsb savings 4.6 c Savingsd13 tione tio 6,400 nf tiong disproportionately $20,000-$24,999 to retirement 4.6 income, 21 mitigating 34 the 63loss. However, 20 Andrews' 6 28 9 job 34, c opportunities over form multiple-job indicated might ontrast, changes having into of raise lump-sum retirement 13 that /one-job received the are percent comparable they potential voluntary distributions transferred accounts, on disparity: of average those retirement with and are the those some receiving (1) when $4,100, presumably dis require income offered c portion repan vested could their cthat y level within oflump participants regarded accumulate would the separated attributable the distribution sum vary plan by during an separate ac the participants' are cto average ording workers tothe available vested anfrom period to insurance of as the benefits $10,500 vested service to producing 1980-1984 returns workers annuity from prior fora preservation service reported current however, security.job In under lump if summary, (that benefits of the A sum portable is, Simple plan, amounted they were theand Hypothetical benefits, were number cashed allto vested benefits $8,600 of it out would workers Model in prior are for a plan not .................................................................... assumed to men receiving diminish retirement, that andprovided to $4,600 fully the preretirement the disparity vest for for potential .women. immediate Starting between lump-sum for This pay preservation lump may actual is sums 6 in the grprivate eaterthan A disc sector, $99,999 repaon ncy in nominal average. exists dollars between Therefore, havea bee ctu na top-cod shorter l retirement ed vesting at $99,999. benefit would An levels e add stimat alittle nd ed36,80 those to the 0 thretirement at adequa Total The retirement $20,000-$24,999 $15,000-$19,999 Effect c"Pension y and income ofultimately Job Portability security 8,478 1,113 1,045 Mobility putof and pressure 11% 11 a What on growing 10 Deferred on It 2% 1 keeping Can Congress number Do 31 13% one 12 Annuity for job ofto Retirement for American 56 raise 35% 31 30Values years Soc65% ial workers. 68 28 Income: Security 40% 37A 9 benefits. Simulation 30% 2738 11% 1 6 the some re$30,000-$49,999 ceived value vesting more of any requirements than benefits one lump accrued based 1,761 sumon under were years asked an24 of employer-sponsored service. to provide Workers detailed 8.8 who pension information change 25 plan jobs only with 6,200 or on him or Total Amount $25,000-$29,999 of Most Recent LSD 8,478 4.6 11 11% 30% 28 59% 56 25% 22 11 8% 34% 33 11 5% Total 50- $48.1 22% 44% 70% 15% 5% 21% 9% Total $48.1 100% $98.8 100% $140.9 100% $6,800 $13,900 $19,800 workershad receivedLSDs equalto, or inexcessof, thisamountas of May 1988. Therefore,both losses $25,000-$29,999 would remain. 818 9 30 60 19 15 34 5 income estimates $50,000 $20 of,000-$24,999 private orsuggest more pension that 1,045 participants final-pay 11 561plan for participants 1 all but 8 12 the most who35spend mobile 4.9 62 their workers preretirement 14 44 . More34 10,300 significantly, 1 benefits outside net jobs retirement, or retirement to reported other retirement, economic held the retirement be some early benefits plan, inadjusted and gain constant such in changing .roll aplan. and When savings--a worker's for over 1988 hypothetical inflation jobs The job ofdollars. career. these most need changes statistically (ornot distributions popular one-job future Under reduce are involuntary, significant pay uses more career the could increases); among expected aggressive benefits increase. be the lump-sum made portability value or that investment (2) The mandatory. of can require recipients the imposition losses result accrued strategies, that This from probably were under defined benefit the Approach." reflect achieved. distributions on assumed $30,000-$49,999 $1 separation -$499 the There to fact Ifand be EBRI the are from that More $30,000 the returns several Issue women service). Sophisticated amount per are 8.8 Brief possible tend year, near of 1,042 no. Eight money tothe inflation Models 65 27 have legislative percent (Employee overall paid shorter ....................................................................... is 15 out had assumed market 54 approaches in job Benefit received these tenure level, 72 todistributions Research be to 0.3 a the and 4 distribution portability expected percent 18 therefore Institute, are 1annually, and discrepancy from accumulate substantial 4 preservation April a prior and 22 300 . 7 job, real A 5 Proportionof all workers [] Vestedfor lumpsum Se retire might x before hThe As In ypo addition noted, thetic effe fulfilling ca tll lump-sum of to y be job retirement vesting amobili chieved distributions requirements ty in oo n cve ome dr efa erre se represent one-job d curity, forfeit annuity c other ar aall ee v portable ar unvested lues goals or if can benefit. benefits som bbenefits. e eti subst mes we In r a put the e ntial. Retirement fully case forward of for her their aggregate when mostand changing recent average lump jobs. amounts sum. The may process Third, be und while eof rstat maintaining 8.5 edto the million degra e workers eportable that the are amounts pension estimated rec benefit eivedto byuntil have $25,000-$29,999 818 10 2 11 35 66 39 22 2 10$30,000-$49,999 $32,811 1,761 $410 14 34 $41059 30 b 5 36 b 4 Sex $50,000 or more 4.9 21 42 65 12 1 13 21 because 1987) $500-$999 deferred •40. annuities are not955 adjusted for 13 pay increases following 0.7 job1changes, EBRI 700 Sex Amount of LSD at retirement. distributions represent these workers only will actually one receive (and excee possibly d 33 edthis percent amount. not the to Av 36 largest) erages percent are of round the lesseconomic e in dto benefits nearest losses $100. than involved. workers who pay savings benefit smaller the approach $50,000 Male $30,000-$49,999 Tax is assumed However, Hay plans lump-sum accounts Reform ormight / more Huggins give to Act help such (17 benefits, increase participants 4,597 1,761 pointed ofprotect percent), 561 a1986 policy all by out, (TRA 12 14 participants else 1 credit could paying however, percent 22 '86) being be for 3 3 loans ofdetrimental annually service from that a equal. 10 or 45 15 16 the unexpectedly other percent .at model's All to prior 69 debts 36 38 dollar the penalty jobs findings retirement (22 figures rapid .63 67 16 tax percent), should inflation. on are security 40 38 preretirement adjusted 5and be regarded If other of 32 29 future 21 many foruses2 6 9 reform, would growth large and failure nearly proportion not to inincluding the vest differ one-third aggregate The and of substantially /further or lump Prevalence had theamount sums either erosion restrictions from are of received available Post-Separation of paid the deferred Statement on annuity to or for workers preretirement were retirement annuity payment on eligible Benefit at relatively values and case. to consumption Increases receive the by 7 young average inflation a ............................ lump ages of . amount lump-sum .sum This . per Among allows 9 Source: Not Male reported Employee Benefit 4,597 Research 12.7 Institute 24 12 tabulations 30 49of the May 61 76 1988 Current 24 13 Population 3 8 Survey 32 16 7 6 estimates $1,000-$2,499 that common rates of job 1,627 change can23 reduce benefits 2by .7 more than 6 40%. 1,200 po pension rtable portability and always and prese prese rved. rvation Signific polia cnt ies gaare ins benefit to retirement equityincome for more might mobile be income defined Resear Male cgains h contribution condu are cte therefore d plans, by 32 the .9asso such Employe ciated distributions 19 e Ben withefit long 4Res 4 represent job eartenure, c71 h Institut full which portability, 1 e4(Eis BRI) associated (as A 4ndrews, the expected with 19 full 11 retirement received $1-$499 lump is referred sums, data 0.3 to as on 1preservation. the amount 0.7 1ofThese the 1 lump .2latter 1 sums two are steps 300 unavailable are the 700subject for 1.4 1,100 of this Female $50,000 30 • or more 3,881 561 10 20 2 6 25 11 55 34 62 78 [] Vest 30 41 edonly 30 22 for lumpsu 5 1m bAssumesa less aggressiveinvestmentstrategyunderwhichhistoricallong-termreal returnshave employee benefit supplement (CPS EBS). 20Female 36,243 3,881 10 453 30 45357 26$453 10 36 b 5 $2,500-$4,999 1,220 17 4.4 9 3,600 Female 15.1 29 46 68 18 6 26 6 Therefore, roll $500-$999 over such it may amounts be 0 appropriate ..7 These 1 estimates to1.7 focus 2 suggest instead 2.8 that on 2the participants potential 700 gains in both 1,800 indefined retirement 2,900 (27 defined for as Atkins, inflation lump inflation rough ample percent) sums G. Under Many Tightening benefit and ex approximations. opportunities Lawrence ceeds that .presented workers the plan are afirst Vesting .plan's not participants Spend reporting alternative, in to rolled c Standards expectations, accumulate onstant Moreover, It over or .receipt Save In plan dollars _Requiring (effective particular, they assets of sponsors It? future . awarned Pension lump for for nominal defined shorter might tax retirement sum that Lump year rates from be vesting benefit portability -Sum 1987) required a if oflump prior plans schedules Distributions return may reforms to job sums are have (on adjust were sometimes might are many that bolstered and the quite rolled enhance might Tax distributions, recipient the 27 The Hay million could /Huggins Effect the full-time be tightening of larger. Cash-Out estimated private-sector The of vesting Opportunities the potential potential standards, workers gains effect on Retirement to who and of lump-sum were measures various Income vested portability recipients' to .............................. prevent at their and retirement the current erosion job 1 of 0 averaged2.3 percentannually. See footnote12. 1987 Family Income value of the accrued benefit at retirement is not diminished if distributions are rolled The workers, achieved vesting Workers potenti.a 2 1987 l e ifo fnhan bo rFamily retirement thced po Income rta international bilit bene y and fit plosses rcese ompetitiveness, rvadue tion to could cash- and be out enh in oppor ca reased nced. tunities national Howeve is large rsavings , incand reased rates. growing. aAggregate 1987) Cash million $5,000-$9,999 -Out has of and these shown Opportunity average re that cipients amounts bec.ause may 1,114 (Indb e addition, e fer understated. red bean n 16 efit estimated While amounts 8.5 million 363,000 ar7.9 eworkers not ad workers jare usted 16estimated to failed refle toto c 7,100 have t pay report testimony. Pension Portability and Preservation $1,000-$2,499 20. 2.7 6 6.8 7 10.7 8 1,200 4,200 6,600 Race Reform. Washington, DC: Employee Benefit Research Institute, 1986• 1987 Race $1-$14,999 Family Income 757 6 19 49 23 14 37 10 $1-$14,999 4.4 14 28 58 15 12 27 16 CAssumes 30 a moreaggressive 40,035 investmentstrategy 500 underwhich 500 historicallong-te 500 rmreal returns $1,501 have If all benefits $10,000-$14,999 were cashed out, workers 449 who spend 6 the distributions 5.4 could 11 lose three-fourths 12,000 of income annuity Rac received e that promised LSDscould as of to May result separated 1988, from dataenhanced vested on the amount employees portability of the most for and inflation recent preservation. LSD between received the A are worker only time available of who for this contribution lead income over young, portability financial regarded trend. to into Including The Thirteen but significant from instruments as qualified by Twenty older potential and a preservation restricting Findings superior percent defined workers gains retirement percent effect other on vehicle in of benefit the accounted could the of retirement of re than c forfeiture ac Receipt those ipients inflation c for plans be ounts long-term retirement substantial. for receiving and reported benefits that on and of aUse the disproportionately accrued provide bonds) preserved of value their would security using Preretirement will for lump benefits of also atlump until deferred for likely least sums significantly long-tenure retirement. large sums Lump-Sum by exceed some during annuities shorter-tenure share can ofthe raise 1987 employees-- substantially their Distributions of The plan's isthe the distribution illustrated reported following total cost discount of deferred preservation in$2,500-$4,999 May 1988, annuity policy 22 Prevalence values percent changes 4.4by were inflation. 9 ofonLump-Sum eligible retirement 10.6This only 11 testimony Distributions income, for 16 a .4 lump using does 12 sum; ................................................. a not model among 3,600 seek that tothose endorse 8,700 incorporated vested any 13,500 at data any 1 0 $1 White -$14,999 7,941 757 11 8 2 1 14 8 36 24 59 65 40 47 32 30 10 1 po over $15,000-$19,999 rtability following alone separation may 1,198 notfrom contr service ibute6.to Under retirement 23 a defined inc 56 ome benefit secu 26 r plan, ity ifthe por 10 tconversion able benefits 37 of a 6 in Approa crease c Any hes s following vested that might retirement sep further arationo benefits n from e or s more erv distributed ice of , d these efine to d goals an benefit employee mayplan be in p prior c aonsistent rticipants to retirement with with whether av White $15,000-$19,999 eraged American they 3.7 percen had workers tever annually 7,941 received 4.7 .typically See foo a tlump n11 ot hold 4e 12 sum.) several . 26 31Fourth, jobs 59 during 58 all lump the 25 20 sums course in excess of 9 6 theirofcareers. 30 34 12 5 7.$15,000-$19,999 1 million of these individuals. Therefore, 211 the aggregate 3 amount of most 3.6 recent LSDs 7 received excludes 16,900 Erosion 10-Due to Inflation their retirement White benefits under 46.5a defined 22 contribution 45 plan, 70 or one-third 15 under 5 a defined 21 9 $5,000-$9,999 7.9 16 17.7 18 26.3 19 7,100 15,900 23,600 $20,000-$24,999 $15,000-$19,999 1,198 735 6 8 1 267 61 28 24 62 436 3230 2 9 Black 426 6 h 6 24 59 42 35 0 Black $20,000-$24,999 426 3.1 14 4 21 36 73 52 28 14 6 2 36 16 11 7 fully separation vests gains and the relative time to of one retirement who does (and changing not; possibly a jobs worker every after who 10retirement years preserves as awell). lump-sum Or the for some sponsoring amount participants prior paragraphs clearly particular Clark, defined increase rate. the $20 tax-qualified LSDs job, ,000-$49,999 In tax-favored Robert by contribution received. that received their one-half approach .the defined examine case, L.Impli current ,retirement savings by and saving, the had Two-thirds c benefit by but ations plans Ann the remaining rolling value .already instead potential A At up .plans place income for McDermed. least of over from 335 of 1.4 Retirement received credit to and the lump-sum million for some the highlight by 18 risk therefore accumulation lump for preserving percent workers, savings--broadly "Earnings their of the Income 5 some recipients sum, retirement first entire possibly leading in the 1986 of their and 10 of Levels vested the to participant assets years were .fund Pension an discourage preretirement However, possible understatement defined--were ............................................ 9.7 benefit under of investment from service Compensation: could implications reported age the sponsorship in 20the achieve distributions. margin of 45 after performance reported aggregate form in lump 10 May .of for The aof 29,100 years, sums For various by a error 1988, Effect 65 1 on 1 dLess on current than 0.5 jobpercent. mobility and pension coverage patterns. Baseline estimates assumed that $10,000-$14,999 Black 5.4 1.1 11 11.6 4 12 18 16.7 1249 12,000 20 25,800 10 37,300 31 15 Hearing on Trends and Issues Related to Pension and Welfare Benefit Plans benefit deferred ar may Uses e plan, ca be shed of cLump annuity onsumed EBRI out-Sum a estimates nd torather n aot Distributions lump p.rese than Moreover, sum rved. saved doesto preretirement not provide adjustfor forretirement cash expected outs income. are future becoming inflation; Somemore workers therefore, common, $99,999 typi retirement $25,000-$29,999 $20,000-$24,999 cal pat (an terns inc estimated ome of mobility sec 735 urity 975 37,000 .may Therefore, 8 distributions) rece 8ive 2 b to ensele efits 25 were 10ct43 an top-coded pe 59 appropriate 30 rcent to70 27 at48 that poli perc amount c 39 y, ent 9priorities lowfor 30 er37 tha must n 1 4 Yet, owing to the design of most employer-sponsored retirement plans, an employee who $25,000-$29,999 0- 3.5 17 32 64 20 7 37 7 Other 110 17 h 17 26 76 24 18 0 amounts Other $50,000received. or more However, 110if no systematic 160 9 relationship 2 24 exists76 between 13.5 the 18amount 28 of5LSD received 67,200 24 and i of$15,000-$19,999 Eligibility•" With very Quarterly few3.6 exceptions, Journal 7 7.2 of neither Economics 7 public-sector 10.2 (May 7 1986): nor 16,900 private-sector 341-361. 34,200 defined 48,400 Other Before the House Select 0.4Committee 34 on Aging 57 Subcommittee 69 on23 Retirement7Income and 30 J and few $30,000-$34,999 $25,000-$29,999 recipients roll these 975 804 distributions 8 11 1into a28 tax-favored 9 60 28 retirement 29 63 plans 416 . 3135 1 4 plan benefit example, percent sponsor Hay until ofHay recipients. /Huggins retirement /might Huggins be estimated Some required cited also agains. consumption Congressional that to cash average outwas the Budget portability deferred reported Office losses annuity byestimate 40of percent based covered thaton of indexation private its all projected recipients, of but approaches. participants, by benefits 20 lump-sum in retirement these age years, these 65, The However, were estimates workers and benefit followed distribution Receipt while not 30 requiring years. c accounted superior ashed is defined by and too an (chart Use large For out analysis shorter benefit infor of on the value to1). Lump-Sum 43 separation support worker vesting of plans percent tohow that keeping shift the reported schedules offered of Distributions from conclusion the thisservice one total lump risk bywould job the amount to ................................................ sums that and for deferred the impose the 30 that employer were received years, use allannuity. additional used vesting of.the tax-favored .by The value promising was Hence, costs average five- of on that a1a2 $30,000-$34,999 4.6 23 44 66 24 4 28 4 10 whether or not the amount 32,811 is reported, distributions 410 and averages 410 will not be affected. b (Without evidence b of $20,000-$49,999 9.7 20 20.2 20 29.0 21 29,100 60,200 86,400 the whoexpected participate Available value inevidence employer-sponsored of the benefit suggests at retirement thatretirement little can oppor be plans tunit reduced yare for permitted p by orseparation tabilityor garequired ins from lies service in to purposes oth be e set rwis am The eo of id ng May e the nti these cpublicly 1988 al pa potentia rti CPS cavailable ipants EBS lly cpursui o asked nflicting data. ng lump-sum on goe als. -job c recipients areers. to Hay indicate /Huggin whether s Comp they any, had Inc. changes jobsAtmay At ultimately Any At Any receive lower Employment retirement At At Any benefits At Any than one with an $35,000-$49,999 $30,000-$34,999 2,241 804 11 13 2 33 13 62 34 63 25 398 3232 1 4 Marital Year $35,000--$49,999 inStatus Which Most Recent 11.1 20 44 74 14 5 19 7 benefit Marital Status pension plans adjust benefits for inflation that might occur in between the nature of such a relationship, the effect on estimated averages is ambiguous.) In addition, in the May Marital $50,000 Status or more 13.5 28 22.2 22 27.5 20 67,200 138,800 172,100 In 1988, one-fourth of full-time private-sector workers were eligible to receive an while workers value lump-sum 30 (taking would percent conversion into increase reported account could from expected some provide 15 percent discretionary afuture participant topay 39 consumption percent increases) with a hedge if all .rather 18 vested against than benefits unexpected on its current from deferred plan credit specified savings size $50,000--$74,999 $35,000-$49,999 of sponsors. increases Policy Thirty-one the Further alternatives vested annuity "Portability Current most issues Interpreting Restricting In .benefits in recent percent particular, Moreover, Prior proportion 2,241 by related and 682 lump lump-sum for of Pension the Preretirement Job inflation to plan 12 sum large because to Data the pay received sponsors recipients 17 private Wealth preservation ............................................................................... would from 3defined Access Current ."a defined increased increase would monthly 39 Unpublished increased 15 contribution and to face Prior benefit Retirement typical 63 annuity portability with 39increased following the manuscript, Job plan plans defined of 26 66 recipient's of sponsors $410 Benefits TRA traditionally retirement retirement benefit after 37 '86. 1987. --Further 5current offer plan 10 plan benefits pay years 28 lump- 31 age, costs 1to 3 3 5 year cliff. Hay/Huggins estimated that portability losses 8 amounted to 15 percent of LSD $50,000-$74,999 Was Received 6.0 34 64 77 6 4 10 12 1988 Married Marri CPS ed EBS public use 6,043 6,043 data base, 12all LSDs 11 2 reported 31 14 to be greater 61 36 than $99,999 66 26 in nominal 387 dollars 3033have 6 5 a cash put and ccele any Math out rated portion em their ati vesting. c vested aofPoli their G cretirement y redistribution R ate esear r poctenti h benefits (Jto a ul lyithe s1inhe 98 when following 8)rent estim they inapolicies uses: leave te thattheir (1) du tha invested etjobs to would that prior somehow in lack to anofIRA;pro (2) tect prior Potential 20 toThe In retirement Accumulation addition, disparity . 36,243 it (However, should between of Retirement bethe acknowledged thebenefit lump 453Assets levels sumthat from may that the 277 Lump provide can lump be -Sum sums benefits realized Distributions considered 453by superior mobile here toworkers those were b identical Married earnings history38.1 and equivalent 22 retirement 47 plan 73 coverage 15 who remains 4 at19 one 8 immediate $75,000 $50,000-$74,999 distribution or more if they 682 818left 16 their current 18 4 job. 44 18 Half of 63 45those 68 22 with a vested 369 benefit 2932 from1a 4 27 July 1990 preretirement $75,000 or more Job job change Job 9and .8 commencement 31 Job 56 of benefit Job 75 payments 15 at retirement. 3 18 7 Sbeen ex Separated top-coded at $99,999. 242An estimated 10 36,800 1 workers 11 had received 20 LSDs 62 equal to 33or in excess 26 of this 0 Separated 242 11 14 59 22 7 31 2 1985-1988 e 3,391 41 19.7 41 6,500 go primary value inflation beyond as .Tax-favored Eleven plans permitted (However, retirement were percent cashed under savings variations income of current lump-sum out were security and in generally law investment spent. .recipients to (Preservation questions However, most results reported prevalent of Hay independent benefit provisions /Huggins only (and equity tax-qualified consumption might estimated of forinflation more allowretirement that mobile least the may only cash- also 25 benefits lifetime restrictions sum for from $500 liabilities shorter-tenure options $2,900 after benefits as 630 on percent lump among toyears. Who preretirement participants, for sums, employees, the Has recipients toThe 28 average the Received value percent. potential according access whose aged worker of Lump-Sum the 25-34 to benefits for to same with retirement preretirement a in survey private first would 1988 Distributions? 10 of benefits to pension then years 456 $18,900 consumption become major of ........................................ coverage might service among employers nonforfeitable result ofat for those retirement each in the greater (Hewitt aged worker . funds 55- 1 3 Separated $75,000 or more 8181.1 17 8 7 9 23 72 48 68 12 379 2622 1 J past job had already received the entire benefit in the form of a lump sum. retirement. ad offered invested sep amount jWidowed ustm arated as en by in t of /vested divorced the a an May These ndinsurance deferred 1988. ves defined ting lump-sum 1,211 Therefore, rannuity, eannuity benefit quire distributions 8 both me pl particularly or nts, aggregate another p 2 59 articip per retirement are and c a ifen 10 nts average future common t fof rom pprogram; rivat 27 inflation amounts losses under e pmay e due 58 exceeds nsion (3) private-sector be to invested understated pa infl 45 rthe a tition. cipa in plan's ndefined to ts a 28 Hthe o savings fa weve ce r, 2 and received Davis Widowed those , Jennifer. Ifover the or that divorced entire many are "Pensions, attained amount years, 1,211 encompassing of by Social the one-job most Security, 8 career recent many and 23 workers changes lump Savings sums 53 (all in ."tax else reported EBRI law 25 being and Issue byequal) economic workers 15 Briefisno. in40 97 May 4 job--in other words, pension benefits often are not fully portable. Research has 30Male 1980-1984 40,035 32.9 68 2,40365.9 50067 29 92.4 187 66 13.8 8,600 30617,100 29 24,000 994 6,600 Widowed or divorced 5.6 22 32 54 23 11 34 11 Therefore, the value of deferred annuities can be eroded by inflation after workers May 1988 Pension Statusk degree Neverthat married the amounts received 982 by 13these workers 2 by actually 15 exceeded 42 this 64 amount. 46 33 2 Never married 982 13 37 54 23 12 35 11 percent by workers, prevalent) out (Employee affect May uses 1975-1979 shorter-tenure to 1988 for the be of Pension their international paid eventual among primary Benefit distributions. directly Status employees workers relative Research plans I competitiveness, to the permit nearing value 1,191 Presumably, employee might Insititute, cash-outs ofretirement also immediate and or December, be the 14 require of increased. national other age more lump-sum some when 89 1989) than savings percent Therefore, form they .and $3,500. 7.5 rates of deferred received paid roll .while Therefore, over.) 16 current Portability annuity the switching distribution; income ifand 7,700 to tax 59. employer. Associates, preservation holding Moreover, Female Viewed three because Forty-one by 1989) of 10-year the portable . age shorter 15 Of percent .jobs 2 at the retirement 31 which vesting is 142 of also these 32.9 the employers $410 would benefits, most workers 33 after directly reoffering cent which 48 10 would .4distribution years reduce 34 would lump-sum have . the However, suffered benefit 4,600 was retirement distributions, received, no retirement 10,100 after loss, income 10 a as years 14,800 similar 63 income they gains percent that were Potential Accumulation of Retirement Assets from Lump-Sum Never married 3.3 28 51 60 11 4 18 22 Among environment. workers in 1988, more than 8 million had received preretirement lump-sum such sometimes contribution expectations losses po aver licies characterized a .10) ging retirement would 23 Nonetheless, impose perplans cas entcosts not reand lativ only the th e are a amount a to t might threat increasingly the on distributed discou toe-retirement job ra ca available ge ree represents empl r income ideal. oye under rs adequacy These a from portable private-sector s findings ponso but benefit. r also ing areas a documented account; The 1988 Nonparticipants Prevalence were (4) preserved that invested of workers Post 3,978 until in-Separation other who eachchange financial worker 10 Benefit jobs rea instruments; cIncreases hed with 28 age typical 65 58 (5) frequency and started earned 38 or often a purchased conservative receive 12 lower a 51 6 May 1988 Pension Statusk Nonparticipants 1970-1974 21.5 579 21 7 41 70 3.4 14 7 7 7,200 20 9 blndividual items may not add to total because some respondents did not report some characteristics of change jobs. Source: Sourc Employee e: Employ Benefit ee Bene Research fit ResInstitute. earch Institute tabulations of the May 1988 Current Population distributions. benefits Amount workersof .)opt Most The foramount and consume they received all lumpaveraged sums available, $6,800 the andaverage totalled portability more than loss $48would billion. Amount and, preservation workers defined Nonparticipants for of The contribution receiving distributions Most second policieslarger alternative 2,672 Distributions plans that received further distributions; exclusively 10 generally prior goals ..................................................................................... to1 might in and retirement would oneworkers enhance of 11 entail these and awith 33 portability, areas transfer after higher may 1986, 64 of it funds not earnings, could the further 40 from 10also percent family those the8defined in1 5 1 expected offer security. associated relationship worker Race themselves Participants immediate changes to Such or with stay is of their revealed. jobs, job distributions restrictions at LSDs. one stability 4,500 so employer instead Sixcould (or to outemployees losses of 35 of involve 12 increasing or 10more associated recipients awho years. complete 32 in separate proportion received with Among 60 prohibition job from their the to mobility), pay, 19 59 service most against percent theitrecent prior real would 7 of preretirement value to covered reduce 27 of 5 1960-1969 558 Joseph S7 . Piacentini 2.7 6 6,600 Participants 26.6 22 47 69 17 4 22 9 detailed below. Amount Survey of Most employee benefit supplement. defined source defined of Importantly, benefit benefit inequity pl plans ans, afflicting whether . po Some tenti mobile a received ll public-sector y lea workers. ding from to exp a plans Because defined anded alsouse benefit some provide of defined of orfor these a defined lump-sum cont disparities ribution contribution are plans business; market retirement aReal Employee value The Nonetheless, return, (6) of Benefit benefits erosion first bought 15monthly the Research than of a available aggregate benefit deferred house those Institute. paid or data who dollar annuity paid in retirement represent pursue off Fundamentals amount values a mortgage; .otherwise Thereafter, more involved under than of(7) a benefit identical Employee would final-pay bought $48value billion more one-job a will or Benefit car; than in be flat-dollar lump (8) eroded careers double, Programs paid sums by defined . off 1 inflation from , loans . Recent LSD Recent LSD Source: Participants Employee Benefit 5,806 Research 12 Institute Research tabulations 3 Associate 14 of the May 36 1988 Current 65 Population 40 Survey 23 6 Before 1960 136 2 0.5 1 5,400 White Defined benefit 46.5 pension 97 plans 95.4 generally 97 135 provide .9 96 for a6,900 stream 14,200 of benefit 20,300 payments Source: Employee Benefit Research Institute tabulations of the May 1988 Current Population Survey CBases Recentof LSD percentages exclude respondents for whom recipient and LSD characteristics were not reported. Slightly more Unlike than indexation one of every of annuity ten recipients amounts rolled and provision their entire of past distribution service into credit, another which exacerbate benefit incomes, penalty distribution another; be 21 percent, plan tax therefore, and when retirement on ofeducation the at rather they least prior it is than were income part important levels. employer the under of erosion 15 their Some to to age percent lump that establish tax-qualified due 35, ofsums but attributable to the shortcomings priorities these new (table savings employer, payments to 5). among the were Thirty inerosion preservation. based accounted these reported percent of on goals the the by for reported value before 36 current only percent of one- only fourth retirement the distributions workers those bNotusefulness applicable. 10 edwith . years Washington, (the to a Uses of portability of individuals remainder retirement service of Lump-Sum DC: loss, falls (possibly offer plans Employee the asdistributions a as average Distributions result with tools Benefit an of for loss inflation, exception only retaining Research ............................................................ wasat23 reaching early employees percent--the for Institute, financial and$187 /or forthcoming and normal hardship). after equivalent rewarding 30retirement) . years oflong- . 1 A 6 . Source: employe $1-$499 e Employee benefit supplement Benefit 1,042 Research . Institute 3 tabulations 21of the May 50 1988 Current 41 Population 9 Survey 49 1 distributions. employee $1-$499 benefit supplement. 1,042 3 i 3 21 50 50 41 1 Black 1.1 2 2.6 3 3.8 3 3,600 8,100 12,100 benefit plan, attributable and wide the plan rcontribution a to v may aa ilafailure bilit be y mitigated that oto f p fully a rEmployee elump reti if vest, rthe ement sum faster plan Benefit paid lump-sum grants vesting directly Research a cost-of-living might dist toInstitute ran ibuti be individual oseen ns, adjustment toasthe will helping p make ossible toto separated tocorrect or dRounded received otherMoreover, debts; to bynearest more (9)$100. than portability paid 8educational million alone workers--a isexpenses not sufficient reasonably for self to ensure orlarge others; that scope (10) benefits for paid analysis. expenses accrued $1-$499 0.3 3 19 48 42 9 50 1 retirement Note: Assumes plan (usually starting pay an of individual $30,000 and retirement real annualacount pay increases (IRA).of 1 Three percent. in The tendefined used the benefit entire A employee beginning Sex Simplebenefit Hypothetica at a specified supplement. l Model retirement age, according to a formula based on final pay or a $500-$999 $500-$999 955 955 6 6 1 286 59 31 26 62 40 11 2937 1 3 aFor Other purposes of determining 0.4 exclusive 1 uses 0.8 of LSDs, 1 "don't 1.2know" 1 and missing 4,000 responses 8,100 were 11,500 taken as "no" aAggregate amounts are understated by an unknown amount. While 8.5 million workers are estimated to have choosing financial savings, policy directions. and 59 percent reported only savings broadly defined. Nonetheless, third value entail deferred of $5,000 $500-$999 those of of substantial From of the receiving the annuities annual total deferred the amount plan identifiable pension lump and annuity sponsor's failure sums received. 0.7 benefits promised costs, at to age perspective, vest in The 7 mandatory 55 alone. 1988 by or average the over, dollars. 28 the Hay former cash-outs compared size /fact Huggins The plan of that 57 distributions .largest might defined concluded with Because 27 4be losses percent benefit perceived increased the that ranged 12 credit of plans restricting those by granted from from provide plan 39 the 40 3 Moreover, similar Two-thirds service process Alternative employees all of employers distributions affects . Approaches Although the offering could value aiding toof be lump Portability the mobility required sums annuity is and reported tosometimes attributable take Preservation the thatform cited to more the of as Reform than second lifetime beneficial one-half ...................... 10 annuities. to years economic of of1 9 det eBecau riment plan se the formula ofsurvey retiis rement was assumed conducted inc tooprovide me. in May an1988, annual it pension includesequal only LSDs to 1.5 received percent of in the finalfirst payfour times to years five of distribution 14Out for financial of an estimated savings (including 284,233 LSD retirement recipients planearning rollovers, lesssavings than $5,000 accounts, in retirement $1,000-$2,499 income is 1,627 contingent on 7 preservation. 24 56 29 9 38 5 vested this Male $1,000-$2,499 perceived participants Lump-sum inequity distributions at 1,627 .a later Other 4,597 date. 8disparities are However, typically 1 are 54paid although attributable 8 directly 28 many 32 to to .9the publi the 62 erosion employee, c-sector 68 43 of plans who deferred 34 and 8,600 then 2 during alndividual Gustman, Moreover, before responses aaperiod items .preretirement Alan because For may example, and of unemployment; not Thomas all add alump job worker to total change Lsums •whose Steinmeier because and reported only will(11) some "yes" .eventually "Pensions, used respondents were response for received translate other was Efficiency did tonot purposes. the byreport into IRA individuals Wages, option retirement some Respondents was information. and subsequently classified Job income here were . as using his received LSDs as of May 1988, data on the amount of the most recent LSD received are available for only 7.1 million months $1,000-$2,499 of 1988. 2.7 7 23 57 29 9 38 5 negotiated To flat evaluat dollar e th amount e poteand ntiallength threatof toservice. retirement When security a vested fromdefined the erosion benefit ofplan service. Annual inflation is assumed to be 4 percent. Assumes no benefit increases following $2,500-$4,999 1,220 14 33 62 20 10 31 5 stocks, 1988, Female $2,500-$4,999 etc.), an and estimated six in ten 1,220 53,666 used(or 3,881 16 the19 entire percent) 1amount 46received 17for some a 39most 15.2 kind recent of 68 savings 31 LSD 37 (including of $10,000 25 4,600 financial or 2 Age or her in May entire Conclusion This 1988 LSD testimony for "tax ............................................................................................................ qualified provides savings" evidence even ifon thethe worker's implications responseto ofone portability or more non and tax-qualified 2 5options 34 cash-out sponsors the by $4,100 percent receiving b growth Mobility." Includes the per most clater ent for and toIRAs, generous of as lump Paper 49 those indicated international benefits employer not percent insurance sums affe prepared received benefits cfrom ting at only and for annuities, age competitiveness, service costs. primary were at consumption for to16-24. age long-se U and associated .SIf, with .25-34 plans other Department due rv Twenty-seven ice the retirement for might to to the employees prior with unexpected $26,800 their effect have workers employer of programs. distributions, Labor, percent on for amakes large employers inflation, who those Office would of these changed long-term those received and of participants be might plans the 25 valued receiving jobs percent Assistant effect at be useful more age according reduced receiving on as 55-59. reported a tool to Alternatively, service eligible of these participants for individuals. each rollovers worker. Therefore, elected and Only the the preservation aggregate the option value . amount And could of the aoflarge be final most further recent majority 10 years LSDs encouraged ofof rthese eceived service, employers excludes by after requiring the which specify LSDs received $2,500-$4,999 4.4 15 34 63 21 10 31 5 separation There is from evidence service. that lump sum distributions are becoming more widely has annuity some the private-sector values option of by investing inflation, plans the provide possibly distribution for implying some on that a inflation tax-deferred deferred adjustment annuities basis in following an should account be retirement, indexed. working, not Even $5,000-$9,999 asked if benefits the to indicate dataare can 1,114 fully how be much portable--that reasonably of their 18 interpreted distribution is, if36 the to participant was represent 67applied carries 19 to preretirement each the use. 6full16 value lump-sum For 25 of 7 $5,000-$9,999 1,114 17 4 21 46 74 33 25 1 was "don't know" or missing. Some workers did not respond "yes" to any of the use options; therefore, mutually- more. Of these, 29,050 are estimated to have been aged 60 or over in 1988, and savings, Prevalence by 16-24 the home remaining purchase, of 1 Lump .4 million -0.1 Sum starting workers dDistributions or . Inbuying addition, 0.4 d ainbusiness, the May 0.6 1988 and d CPS debt EBS 800 payment) public use 2,200 . data Just base, over 4,000 all LSDs one-third reported Clncludes participant d Secretary e $5,000-$9,999 ferred tax an for leaves n qualified uity Policy• valu his savings, eWashington, s orund 7.9 her savings erjob defin prior accounts, DC, 17 ed b to 1987 enreaching e and fit . 35 pla other ns financial retirement due 68 toinstruments jobage, 17 mobthe ility, . benefit and 6 the promised pot 24ential 8 Race final preservation only $10,000-$19,999 discretionary (probably policy higher) consumption. for 660 retirement pay or aFive later income. 23 percent (probably It42 indicated begins higher) 67 by some describing flat-dollar mix 11 of the savings amount, provisions 7 and the20in 13 no cash-outs This incentive distributions for retirement $10,000-$19,999 retaining maximum increase to benefit income, employees sponsor ofor refle $20,000 minimum relative cts asa 660 the the plan. and orto fact trends amounts more rewarding those 23 Therefore, that saved toward receiving older for5 long at lump-sums while workers wider least service. deferred 28 some availability part are . Some of shorter-tenure generally annuities, 56 thatof plan amount lump 80 more sponsors, this sums workers on would likely 33 a and tax-deferred ifto imply faced would greater have 22 some with a 1 defined both frequently exclusive workers contribution horizontal andimmediately later percin plans entages their retire to may careers accept with add .tothe 9less rollovers, same than 100 final by percent. permitting pay, is thedirect same trustee-to-trustee for both workers. 25-34 6.0 12 16.2 16 27.5 19 2,900 7,800 13,100 to be greater than $99,999 in nominal dollars have been top-coded at $99,999. An estimated 36,800 workers had 30,964 $10,000-$19,999 are estimated to have 8.9 been 25 aged 55 or 43over when 68 they 11 received their 7 most19 recent 13 spent avthe ailable, entire both distribution from defined (on benefit living expenses, plans andeducation, from increa cars, singly orpopul otheraruses) defined (See chart). virtually earmarked Because none deferred-annuity for adjusts retirement. benefits disparities Alternatively, to offset do inflation not theoccur employee that in defined occurs may pay in contribution between regular separation income plans, atax move from dlncludes the receipt accrued rather all financial benefit thansavings, retirement with him purchase orcash her of when aouts. house, changing payment of jobs--retirement a mortgage, and payment incomeofmay loansbe or debts. $20,000 or more 495 22 44 70 9 4 19 12 $20,000 White or more 495 7,941 22 10 94 29 62 46.5 81 9730 22 6,900 1 Preservation is growing in importance in large part because evidence suggests to gains 35-44 thatto worker retirem isen locked t in 14.7 com in, e 31based that mi 34.5 on ghthis be 35 or achi her e 52 ve current .3d by 37 epay nhan 5,500 or cing thethi flat s 12,900 typ dollar e ofamount 19,600 portability, blndividual received LSDs itemsequal may to not or add in excess to totalof because this amount someas respondents of May 1988. didTherefore, not report aggregate some characteristics. amounts are understated $20,000 or more 23.2 26 53 75 13 2 16 9 LSD. No low-earning recipient of a large LSD aged 60 or over in 1988 normally worked amount plan basis,design astransferred didand 6 percent pension fromoflaw the those prior thatreceiving contribute plan would distributions to generally the disparity ofbe less insufficient between than $2,500 actual to .cover retirement Some the cost potential certainly consumption. mandatory prevalence Moreover, savings gain change of defined from forgone defined infaster plan contribution by contribution type, vesting, planmight sponsors plans longer-tenure not plans are be who expected in inclined provide general, workers to tocash-outs. incur continue which might a unlike similar . suffer If the defined cost if sponsor total to sponsor benefit plan had not a elncludes After transfers Hay longer /Huggins 30 tenure Hay purchase years, of/Huggins lump Company, and the of sums, a higher total car estimated education Inc.-Mathematica monthly or earnings by that expenses raising annuity at requiring prior the expenses payable Policy jobs. penalty full Research incurred and totax the immediate on during worker . preretirement "The a period keeping vesting Effect of of unemployment, one would distributions Jobjob Mobility affect is .and on other Black 426 5 1.1 2 3,600 45-54 12.2 25 23.7 24 32.0 23 9,200 17,900 24,200 cont to the ribution degree pl that ans. the amounts Therefor received e, theby im these porta workers nce ofactually preserexceeded vation to this reti amount. rement income toward plus service a these 10 andpercent commencement plans penalty is sometimes tax of on benefit proposed the payments distribution as a .way and to promote use the equity. remaining distribution for c eroded IncludesifIRAs, its value insurance is not annuities, preserved and other until retirement retirement programs . . USES. Most preretirement lump sums are not rolled over as much as 35 hours per week that year. Moreover, because these estimates are based on that Age When lump-sum Most Recent distributions are becoming more common. Between 198311 and 1988, specified it Age is Other When useful Most byto the Recent asplan sess. th Had e magnitud the110 worker e ofstayed the di 1 son parity the be job twuntil ee 0.4 n multi reaching ple- 1job retirement and one- 4,000 age, job Pension Who Has Benefits. ReceivedPaper Lumpprepared -Sum Distributions? for U.S. Department of Labor, Pension and Welfare 55-59 7.7 16 12.7 13 15.5 11 18,900 31,300 38,400 of Age bFor the When purposes past-service Taken Most ofRecent together, determining credit. the exclusive The Hay/Huggins later usesemployer of LSDs, and Andrews "don't would know" be analyses and charged missing suggest with responses making that were theup effect taken the as of "no" plan cashed portion spending benefit dlncludes plansless traditionally Because levels of out tax suited isdistributions the qualified held received benefit, tolarger constant these pay savings, benefits by the distributions paid goals. mobile while plan's savings to as one-fourth more workers ultimate accounts, lump are benefits sums, more costs and and of likely other all shift hypothetical are would recipients gaining financial to to have be shorter-tenure saved instruments. importance. been levels earning on lower, that aemployees. $50,000 tax-qualified could because Totalbe orreceived the more And basisin covered $1,501; Most Such the workers' combined workers proposals average reporting annuity might portability also payable lump-sum help losses boost to receipt the bythe worker less national had than moderate holding one savings percentage three earnings, rate. jobs Empirical point. isand $994. the However, Pr LSD oport Was ion Received usingentirelump-sum for: LSD Was Received day a flncludes small Treasury purc number hase bills, o of f arespondents, 56 car,percent and other or uses a 38 relatively . percent; large long-term degree of corporate samplingbonds, error may 12 percent be current consumption or some other form of investment. 4 Benefits secu 60 or rity over In Inis Administration. terms 1988, growing. of roughly international 7Although .4 Washington, one-fourth 15 competitiveness, cu 11 rr.ent 3of11 DC, lfull-time aw 1988. pro 12.8 vides it defined has 9vehicles been benefit 15,600 argued forplan pr24,000 ese that, participants rva because tion, 27,200 lump- in LSD Was Retirement Received policy debates are giving increasing attention to the importance of responses. For example, a worker whose only "yes" response was to the IRAoption was classified here as using his the caree proportion r benefit of levall elsworkers under hy who pothreported etical circ having umstanreceived ces. Tab ale lump 1 prsum esents from thea rplan esults atof a his elncludes 16-24 or her In allMay pay financial or 1988, the savings, 1,225 flat 20 dollar purchase millionamount civilian of a 4 house, would workers payment 23 typically aged of a 49 mortgage, have 16 orbeen over 34 and adjusted (or payment 17 13 percent of upward loans47 orof debts all . 2 Age 16-24 in May 1988 1,225 3 1 4 24 51 50 37 2 difference. Rollovers or present 8 percent; . The 90 andpercent long-term confidence government interval bonds, for the 5 percent proportion or 3 of percent. LSD recipients Past potential earning glncludes prese unexpected rvation education inflation lapses expenses, on would retirement and have expenses devalued income incurred the is already during plan'sa annuity period very of substantial obligations. unemployment. for However, some workers participation than by some 1988 1workers 6-24 smaller was workers Expanding saved who ones, inmight private remained onSocial the a lose tax-qualified proportion defined 2.3 due Security withto one contribution potential --Unlike of basis, job. 6 lump-sum Next, declines whereas employer-sponsored plans 17 the monies in discussion 7 grew percent plan 38 used from sponsorship. of for provides 3 20 8 recipients retirement tax-qualified million quantitative 18in earning plans, 1980 saving 57 less Social to is 38 3 the average research model size suggests generally of distributions that did anot substantial include at different extreme proportion earnings cases of levels pension of jobdid mobility, assets not vary represents where as sharply the effect additional as would the or her entire LSD for "tax qualified savings" even if the worker's responseto one or more non tax-qualified options 25-34 16-24 3,755 161 9 2 28 61 0.1 24 0 9 33 800 6 flncludes sum retirement More medium-sized 25-34 rSophisticated ecipients purchase income and usu of a large a gains Models car 3,755 lly do and private are not other associated exe 9uses. establishments rcise2this with option. job 10 were stability, Inc in32 rplans easworkers edthat p 67 rese granted are rvation 39 being atcleast agiven n 29 bolste one rad5 preservation. Increasingly, retirement plan participants who leave their jobs before Age When Most Recent returns less hNo 25-34 observations than for$5,000 eachinyear category. in 1988 prior 13.3 whose to 1988 most 1were 3 recent calculated 28 LSD amounted using 65 theto16 assumed $10,000 9 real or more returns 26 is for 9 Hewitt prior was "don't job Associates increased know" or. missing. Lump from -Some 6.6 Sumpercent workers Optionsdid toand not 7.5respond Postretirement percent, "yes" while to any Increases the of the proportion usein options; Pension of therefore, all Plans those mutually- , during such Financial workers) the savings intervening reportedyears having to been account participants for inflation in a (and pension possibly or retirement for some plan real • at Recipients a 35-44 2,042 13 30 60 27 6 33 6 25-34 35-44 2,042 2,348 13 2 28 15 38 6.0 66 1239 32 2,900 2 because and LSDwill Was Both be this Received of of outcome increasing these alternatives cannot importance foreseen, would toas increase a long growing as the the number cost discount ofof sponsoring rate workers usedin to defined the convert future. benefit the evidence Security than larger$10,000 than Old onthe the Age reported proportion degree and Survivors such of of portability saving recipients Insurance . and reporting preservation (OASI)such provides achieved saving. fullyunder In portable contrast, current benefits the policies. 11with glncludes be million earnings. savings larger In inrather education . addition, 1987, Those than while expenses earning shorter redirected defined and between vesting expenses personal benefit $10,000 might incurred participation savings diminish and during . $30,000 Requiring apreservation, period grew annually of more unemployment. or further modestly, tointhe 1988 encouraging detriment from accounted 38 ofthe 35-44 15.2 20 41 67 21 3 24 9 exclusive horizontal percentages may add to less than 100 percent. each iLess than year0.5 since percent. the LSD was received. approximately 1989. Lincolnshire, 10 percent IL: Hewitt to 27Associates, percent. 1989. r incentives etirement More to income. sophisticated remain Howeve at theirmodels rcurrent , mand confirm a jobs ted p beyond rese thatrva disparities ti the on point or larbetween at gewhich penalties job actual changes onbenefitwould levels hoc retiring 45-54 45-54 postretirement receive the annuity value 850 850ofincrease their 22 accrued 20during 5 benefits the 41 26 1983-1987 in62 50 the form period, 70 18 of immediate according 359 lump-sum to 2227 the 1 8 35-44 3,149 37 14.7 31 5,500 16-24 2.3 5 7.1 7 12.4 9 2,100 6,700 11,700 who 45-54 participated in a plan 10.1at a prior 25job who 55 reported78 such a distribution 4 3increased 7 15 increase hlncludes prior job.discretionary inAcompensation) total ofand 8.5nondiscretionary .million By leaving workers consumption. the (7 job percent prior of to all retirement, workers) the reported worker having forgoes Any savings ,, _..... [] Amounts Clndividual items may not add to total because some respondents did not report some characteristics. If the year the LSD was received was not reported, it was assumed to have JBecause percent plans annuity 55 55or orfor over over the to ofboth a lump-sum survey lump private- was sum conducted 385 recipients 385 and reflects public-sector 31 inthe May who 28 plan 1988, reported 7 sponsor's includes employers. 53 36 only only true tax-qualified LSDs 70 The 61 expectations, received first 75 19 would uses in the such increase accounted first 293four a reform tothe 25 five for 23months cost 22 0of 6 million the It evaluates 45-54 assurance to 40 portability million of preservation (Turner under defined 1,666 . and Credit Belier, benefit for 20 all plans, 1989) Social . using Security-covered hypothetical 12.2 25 models. employment To9,200 assess is retirement for preservation 54 percent The 15Rate income Hay ofs of pension /Huggins of all security. return recipients savings model applied Workers and attributed might to48 LSD percent terminating therefore amounts mostofportability contribute the after are total based only amount losses toaon national few long-term to received. years thesavings, erosion ofhistorical Those service to of the real are 25-34 13.3 28 33.7 34 53.1 38 4,100 10,500 16,600 55 orover 6.8 41 75 82 13 1 14 3 The Receipt and Use of Lump-Sum Distributions be p U.S. iLess and 1988 rermore eti hypothetical th .Bureau ra ement n 0 efficient .5 percent of use Labor one-job from of . lump Statistics the career sums standpoint benefit (1989). might ofdiscou levels the A 1989 overall ra can ge su be some rv economy. ey substantial. of wor 456 ke 19 rs companies If fro Most workers m cworkers ommitting with are defined in hold fact Consumption dlncludes IRAs, insurance annuities, and other retirement programs. McArdle, 55-59 "The Tax Treatment o545 f Pension and 6 Capital Accumulati 7.7 on Plans 16 ," EBRI18,900 Issue been received when the current job was started, based on reported current tenure. If Ibbotson 35-44 Associates. 15.2 Stocks, 32 Bonds 31.1 , Bills 31, and 43.7 Inflation: 31 1988 8,500 Yearbook 17,300 . Chicago: 24,400 any returns received such reported at adjustment, least by oneIbbotson and lumpthe sum value Associates from of such the (1989) promised a plan;for 1.1 benefit various million may types workers be eroded of investments. had received by inflation more . I | | I I I I I I should be perceived as cost-neutral. Moreover, this approach might entail some percent associated Year the given earning degree inwhen Which less of the with to Most calculating than which total Recent participants $10,000 amount portable benefit represented distributed who lump-sum amounts, separate (table 13 and benefits percent prior all 6).benefits to are The of retirement preserved, recipients 34 are percent payable bythis and requiring of only testimony received recipients asthe a lifetime 13 reports Year JBecause deferred possible likelyinto Which As the benefit have annuity the survey Most accrued proportion of Recent values was theconducted overall only byofinflation. a retirement economy. in small May 1988, retirement If plan benefits And includes sponsors a growing, benefit. that only LSDs are adjusted productive Current paid received out vested law inprior economy thepermits first benefits tofour retirement isto private of five months in of elncludes 60 or over tax qualified savings, savings 608accounts, and 7 other financial 7.4 instruments.15 15,600 kA worker is considered to be a pension participant if he or she reported inclusion in a pension, retirement, profit- worker Brief no. changing 17Assets 82 (September jobs reported receives saved 1988). benefits may have equal subsequently to those ofbeen a worker spentremaining or may beat spent one in job, Y disc neither Ibbotson less e45-54 arrin etion mobile Which the Associates, ary date than Most income Recent of such receipt 10.1 1989. to economic ta 21 x-qu nor that alified efficiency 16.6 of s tenure 17 aving. criteria were 20.3 would reported, 14 dictate, 14,500 no past economi 23,800 returns c growth were 29,200 and benefit more than While plans three found rollovers jobs that over of one-third lump-sum the course haddistributions of granted their careers, a postretirement are not so mandatory, disparities pension may asincrease discussed be larger to than Weighted 1Portability average real issues returns are sometimes for each year tied were to assertions calculated that using the theAmerican asset mix work 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1988. LSD Was Received LSD Was Received the Viewed than sharing, future oneanother stock, .lump orsum. 401 way, (k)-type Among a defined planthe at a benefit 7.1 wage million and plan salary lump participant job, sum or reported recipients stands a self-employed towho gainreported from jobjob and the stability, contributions amount to an 55-59 4.7 10 6.8 7 7.5 5 26,800 38,400 42,600 flncludes LSD Was all Rfinancial eceived savings, purchase of a house, payment of a mortgage, and payment of loans or debts. all else 10Th beinge equal lump.sum Such may plans provide are generally an ex post less benefit common of greater than final-pay or lesserand value flat-dollar than a new ccumulated. findings on Where the the receipt recipient's and use current of preretirement age was over lump-sum 65, returns distributions were nonetheless . It annuity administrative employer percent reporting 5It of (or only from is the joint sometimes c consumption total which ost lifetime saving, amount they argued annuity separated since accounted distributed; that, the for plan the to viewed for the increase worker sponsor 21 remaining from percent and their will thethe not benefits of 32 perspective total worker's percent havedistributions in toresponse of tra of spouse c recipients life-cycle k separated . where to spending earned vested force the defined considered separated reported IDataform areis for workers benefit becoming of forparticipants essential lump who 401(k) in plans 1988 sums more rep plans ort to to ed increases, for the tautomatically hmobile alin lhay inflation, retirement 1986 hadoand ncethe received by /or the cash the question income that a laverage ump U.S. out -sum the disecurity strb of any General potential ut portability whether ion vested fromaof rAccounting etire for America's these benefits men loss retirement tplanbenefits afacing t a pr of iOffice oaging rjob) terminating income covered are population (GAO, preserved gains workers 1988), . 20 Age IRAWhen or Keogh. Most Recent 1988J 1988J 451 451 18 21 5 43 23 69 46 74 21 315 2526 0 5 those kA international above, salaried 60 worker orimplied over they is retirees considered are competitiveness byallowed the since to simple 2.0 bJanuary e and a pension 4model. encouraged may 1, participant 2be 1985 .3 However, impaired. 2 by (Hewitt ifthe heworkers or tax 2.4 she Associates, The code. reported 2 policy also The tend 15,400 inclusion implications degree 1989). to have into 22,500 aFederal which pension, longer of this workers 24,200 pensions retirement, tenure atprofit- glncludes purchase of a car and other uses. plans, the 1988 deferred kcovering annuity, 17 per depending cent 2.5 of full-time on36 whether defined the 59 rate benefit of 71return plan parti eventually 25 cipants 1 realized in medium- 26 on the 3 computed until 1988. For workers under age 65 in 1988, future potential returns were particularly ofLSD their Was 18Th most Received from erecent 1983 longsurvey lump tenure sum, findings at these a final presented distributions job followed by amounted Andrews by immediate (1985) to $48retirement. and billion, Atkins or3an (1986) Turner, excluding and from saving long John tenure very patterns, A., small and discourages Daniel not proportions allJ.consumption mobility. Belier, reportedly eds. However, of Trends invested lump-sum available in Pensions. indistributions life evidence insurance, Washington, suggests is necessarily real DC: estate, that U.S. such sharing, 1987 stock, or 401(k)-type 1,220 plan at a wage 16 and salary 39job or reported 61 a serf-employed 22 job 5 and contributions 27 to 11an 1987 1,220 18 3 20 46 72 37 31 1 documents participants. Not reportedtrends in 0.4 the receipt 1 of0.these 7 1 distributions, 1.0 1 projects 8,600 the potential 15,300 20,800 Complet appropriate) circumstances employees $30,000 e rollov The or that more e foregoing beginning rsencountered w would e and re most received evidence amount at a cspecified after ommon to 39 suggests their lump percent amon retirement separation sums that gofrof e all a ci.less p age. relatively dollars ie The nts than Therefore, second age distributed. $3,500 d small 55would .or proportion expanding Small ovThe increase er (2 benefit average 8of % OASI, ),total the rec cash- cost size ilump- pienof ts for retirement In eachincome case, the purposes potential will costs increase of theinrestrictions importance. andThe possible potential implications implications for 1987 6.3 23 49 65 14 4 18 16 hlncludes education expenses and expenses incurred during a period of unemployment. sized lump-sum and asset large exceeds private establishments or falls short ofin the 1988 discount (U.S. rate Bureau usedofbyLabor the plan Statistics, to convert 1989). based on the long-term historical real returns from the constructed series: 2.3 percent detrimental suggested Department immobility provide currently 16-24 for realize lower are to automatic of retirement similar Labor, levels retirement of to 1989. postretirement saving those income 1,225 income of and security. the higher gains cost-of-living mobile-worker 15 levels In bytheory, rolling of consumption. adjustments equity individuals their2.3 distributions issue, This expecting (COLAs). since 5may into itbe pension is In because qualified this 1987, 2,100 options the assertions IRA 1986 1986 jobs or Keogh and they may . future, hold be unfounded late and 920 920 in amounts their . 15 For careers, invested example, 15 3 which in the 32 "other." 18 could proportion make 61 The 39 of more the nonfarm 70 22 disparities conservative employees 388smaller. return 29 who 30 had1 9 receiving distributions of $10,000 or more (22%), and recipients earning $50,000 or more 1986 5.8 26 36 58 19 4 23 19 average ilncludes discretionary of about $6,800 and nondiscretionary per recipient, consumption in constant . 1988 dollars. 13 7This is because the process of converting deferred annuities to lump sums is the annuity to a lump-sum. Nominal rates of return (on many investment instruments annually accumulation 1985 25-34 1985 for the of assets more 800 conservative 800 from the 3,755 15 roll15 mix overs, 2 and and 453.7 39 17 examines percent 69 45 annually the 13.3reported 72 19 for 28 the uses 308 more of these 21 4,100 27 1 3 some possibly the associated outs sum most from amounts potential 4Employer Itat should defined recent the with are expense uses workers be distribution contribution currently contributions noted identified ofhired that tax prese received plans separately incentives while later to rved qualified are in this on ranged their also approach for in a the tax-favored plans employer-sponsored careers common. from 1988 are might approximately by questionnaire not As basis. requiring provide included will be Larger plans, participants seen their $3,300 in and taxable distributions later last might classified for employer in with income, be recipients this one here some andto assumptions benefits for plan 1988 at least retirement earnings sponsorship 10 in retirement years also income and exclude of job participation might security tenure thereduce 30 and increased percent must their related be reportedly net from assessed publi saving 27 c policy percent invested .to Requiring achieve are ininsubstantial. 1983 company the defined to same 28stock, contribution percent life-cycle because in 1985 5.1 14 61 78 7 9 15 7 in 1988 (22%). Because larger distributions were more likely to be rolled over, completely- one-half perceived JLess retirement than of 0.5 inequity vehicles full-time percent. which is participants therefore purportedly an in state empirical impedes and question local mobility. government . As part of pension both the plans May were 1988 in Andrews (1987) demonstrated the economic consequences of pension portability, other based 1980-1984 35-44 than on an long-term expected 2,403 bonds) nominal 2,042 are discount widely 13 rate. believed 25 30 Therefore, to rise 60 like and 15.2 deferred fall 25 with 32 annuities, inflation 8 over converted 8,500 33 the 5 aggressive 1980-1984 2Delays mix. These until2,403 full returns vesting 13 were generally accumulated 3 cannot 15 based exceed 36 on7the years 66 number under of 38private years 28 until plans the 3 $1-$4,999 3.0 6 5.0 5 6.4 5 10,500 17,600 22,400 as and spending savings manyand employer-sponsored broadly saving defined patterns may that retirement have theybeen would plans reported havenow chosen asprovide "other" if thefor uses value before-tax inof 1983 the deferred and employee U some 1988, .S. Department while of Table thisthe 2 may summarizes proportion of represent Labor. Bureau with the in-kind at distribution ofleast Labor employer five Statistics. of years lump-sum contributions of Employee tenure recipients rather remained Benefits than andconstant in amounts participant Medium atby 45 and 1980-1984 13.8 23 45 74 13 3 18 8 rolled distributions accounted for 22% of the money received (compared to 11% of recipients). those protection provide discussion, way distributions earning 45-54 toreceived enhance some $5,000 against . available benefit Finally, later to portability unexpected $10,000 in evidence payments this a career and testimony annually 850 inflation, suggests preservation. for areservice more to reviews itthat more would likely 10 rendered small than portability to notbe distributions adjust to $10,000 invested prior 10 and benefits .1employers. for preservation in are workers tax-qualified for 21 rarely expected Both earning prese policy of14,500 rv these ed. plans kBecause 1975-1979 to the accsurvey ept roll was overs 1,191 conducted mightin add May5 to 1988, the includes administrative 19 only LSDs 53 cost received of 31 plans in thethat first 10 four do not to five 42 months of 4 1975-1979 1,191 6 1 7 22 57 46 36 2 long lump $5,000-$9,999 run, sums providing do not adjust a 1.8 relatively benefit 4 constant levels 3.7 4for andfuture modest 5.5 inflation. 4real rate 3,300 of return. 7,000Therefore, 10,300 if worker and rarely would exceed reach10 age years 65. in public plans. contributions. Moreover, the earnings on retirement plan account balances are not taxed pension classified Large choices. Implications plans CPS 1975- EBS that Firms 1979 Ifbenefit The national as and provided for more 1988 consumption the had Retirement .May savings aggressive instead automatic Washington, 1983 7.5 were inbeen CPS Income prior assumptions postretirement the pension DC: paid work. 26 overriding Levels as U.S. supplement, current Uses include Government 39 COLAs, goal, not compensation. employer identified workers the 75 andPrinting Census one-third stock. might separately 16 However, Bureau Office, GAO be were encouraged categories in collected 1989. 5there in1983 plans isinclude 21 data to were that save on 4 percent. using a simulation Moreover, model disagreement . 6 For defined exists benefit over the plans extent that to base which benefits potential on final retirement average 1988. 1970-1974 579 1 21 59 26 12 38 2 55-59 1970-1974 579 1 214 1 3 2 25 4.7 61 1040 28 26,800 1 selected $10,000-$14,999 characteristics. 3.0 Most 6 lump 6.8 sums 7 were10.2 of small 7 amounts, 3,600 but8,300 larger lump 12,400 sums future 1970-1974 inflation exceeds the 3.4 plan's 14 expectations, 47 future 78 nominal 11 rates of6return will 17 5 Evidence inflation. on a current suggests 8Including In addition, basis. that losses Therefore, rol itlovers could due gained to expose taxes bothare popularity failure separated generally to vest following vested due and when erosion participants the lump establishment ofsums deferred to investment are of annuity paid. IRAsrisks in 1974 Therefore, "used might approaches disagreement matched retirement to imply 3Defined 16The However, to start accounts. although and the an over May orthe Ibbotson incentive benefit purchase expanding how 1983 implications faster However, closely plans, series, Current for vesting amandatory preferential business" therefore, and the actual respectively, Population might fact costs behavior OASI that (reported make associated are hiring: Survey younger often as would portable follows follows: the by characterized employee with first limit recipients 3 the percent benefits these guaranteed against employers' life-cycle benefit approaches and of available as young recipients those being model. interest flexibility supplement workers .to with "back- more Moreover, instruments inlower in 1988) also $50,000 currently income gains or domore so. from And and long if workers the tenure restrictions earning actually less placed discourages than on$5 lump-sum ,000 mobility. . The access Allen, latter lower Clark, groupthe and is composed perceived Before 60 or over 1970 694 171 1 2 21 44 2.0 36 4 15 15,400 52 3 Before 1970 914 1 2 3 25 49 50 29 1 $15,000-$19,999 4.7 10 10.4 11 15.3 11 5,100 11,200 16,400 IA granted more the worker receipt by Andrews' is at a considered least policy and use one estimates allowing toof be adlump-sum ahoc pension unrestricted suggest postretirement participant distributions thattax-deferred aifhypothetical he annuity or by shecivilian reported in saving. crease worker workers inclusion during holding .in a the Workers pension, four 1982-1986 jobs retirement, were with profit- pay, the simulation indicated that a worker holding one job for 40 years would receive likely Befor exceed e 1970 the plan's discount 3.2 rateJ . In that1case, 4 the 44 by rolling 33 over the 14 lump sum, 49 5 and values, However, "paid measured an loan employee or other against can debt" hypothetical continue (reported to one-job defer by 22taxes percent) benefit by .rolling levels In addition .the distribution , the 1983 into choice an IRA and asked to loaded." the throughout 90-day application LSD • Employee Although Treasury recipients the of late the the Benefits bills, 1970s to life-cycle law indicate company and requires in State early model whether stock that and 1980s to benefits to Local they preservation .common It used Gove is accrue too any rn stock, ments, early issues ofsteadily their balanced tois 1987. know LSD complicated over Washington, whether for funds aselected worker's toby these one-half the DC: career gains McDermed (April 1989) point out that workers with pensions exhibit less mobility accounted $20,000-$24,999 for a large4proportion .6 9 of9.8 the 10 total (conmoney tinu 14.5 ed) received 10 .5,000 One-half10,800 of lump 15,900 sum sharing, stock, or 401(k)-type plan at a wage and sala (continued ry job, or)reported a serf-employedjob and contributions to an (continued) perceived not The asso views ciated expressed as having with in inflation. a this highstatement likelihood And, are unlike ofsolely leaving annuity those long of benefits, before the author retirement, which and should typically thenot second include be attributed earnings workers, designing are without compensation less preservation likely to packages, opt for retirement preservation to the in possible come may security detriment indicate might that of labor some not be market younger enhan efficiency ced. and If. value of the plan to participants, employers might find that their plans' effectiveness as the participant may achieve a retirement benefit superior in value to that offered by the continued or "bought asked a qualified during whether house" the employer-sponsored they (reported late had 1980s ever by 10 (following received percent retirement lump the in 1983) (Tax continu sums plan Reform was from ethat d / expanded aaccepts Act prior ofjob. 1986), to rollThose ask overs but "bought .responding itInisaddition, clear house that purposes. How common in U favorable increasing period, .$25,000-$29,999 S. nominal Government Portability according stock tax Fewer tenure terms, treatment and alternative over Printing to in one-half and 4 an BLS .640 granted environment Preservation 10 years, Office, (1988) long-term uses.to with were 9.8 1989. distributions with corporate constant 10 included Afinflation fect 14.1 defined bonds, in that Retirement the 10 (and are 1983 equity contribution /orrolled 6,400 real questionnaire funds Benefit over compensation to plan 13,500 into common Levels coverage, tax-qualified than 19,600 stock, in the than IRAor workers Keogh. 9Hay/Huggins without pensions. points outTheir that study their model concludes reflects that only pension primary losses plan from coverage. to the Employee Benefit Research Institute, its officers, trustees, sponsors, or other staff. The deferred annuity. Hence, a lump-sum conversion could provide a participant with against or annuities lower-earning $30,000-$49,999 paid older mortgage" for survivors, workers workers (reported 8with .8the are 18 past income not by service adequately 918.4 percent security 19 to be in provided planning credited. 1988) 26.5 19 and by forBoth athe their lump 6,200 would 1983 retirement sum choice increase 13,000 can vary "invested sec the urity. 18,800 depending overall in rollovers 1988 accounts Moreover, the increases 10 remain questionnaire; percent relative in if such the small penalty to exception an those (and as expansion tax a frequently that result, israther not are were imposed innot. than 1983, unpreserved) financed Empirical the if 63 the rule. per through worker evidence cent distributions of has anLSD suggests increase died, recipients paid become that into the pension shorter-term indicated disabled, payroll-based savings that or has increases) a About preretirement money tool for 40 market recruiting percent the job real funds of termination value and covered to retaining 90-day of benefits workers can Treasury employees beaccrued inhigh thebills, model and islate reduced government probably were in a .worker's also Both result bonds covered ofcareer in these to lower by long-term will effects one voluntary be or might greater more Employee Benefit Research Institute is a nonprofit, nonpartisan public policy research affirmatively were asked to report the amount of their most recent distribution, when Thr Butee among basicthe featur 456 escompanies of plan design surveyed contribut by Hewitt e to the Associates disparity betw in 1989, een actual just 1 $50,000 or more 4.9 10 10.1 10 14.5 10 10,300 21,200 30,400 protection against unexpected inflation. Of course, investment returns may be affected, are other reached not financial 6The fully age simulation 59 offset instruments" 1/2.by Other reductions model special (reported usedin provisions byother Andrews by 17 savings may percent wasapply. (Davis, developed in For 1983) 1989). more inwas a Therefore, series information broken of studies into iton is the by they than government attrition supplemental the used . value However, atbonds, least plans. of benefits part Gustman marketable Because of their accrued and these LSD bonds Steinmeier earlier, for supplemental tounidentified long-term all else (1987) being plans corporate "other" find equal are that uses. bonds, typically . the Choices lower and defined index were mobility contribution funds expanded of to organization. on While thefurther longevity research of the is beneficiary needed, it and appears any survivor, that there even is a absent substantial inflation. potential for If allOASI cost employees lump-sums oftax, sponsoring employers result reported in a defined who fewer to the could or benefit Census smaller not offset plan indeferred 1988 and the reduce increase had annuities been the through usefulness rolled payable over, reduced of at the the retirement, spending average plan as on a amount means Not reported 12.7 26 24.8 25 33.9 24 12,400 24,300 33,200 either positively or negatively, by any number of factors in addition to inflation. "savings account" (reported by 17 percent in 1988) and "invested in other financial taxation common Clark reasonable in r percent etir 1988 ement and 12Aithoug of in of stock. McDermed those benefit part lump to conclude to The sums, providing hhelp le these resulting ve(1986) ls see that identify and increases any Employee amixes and hypoth policy benefit theby applied uses are that eBenefit ti Allen, increase csmall, al successfully underlying on for Clark, e- Research they the job extended more and ben are these encouraged eInstitute, McDermed fit nonetheless conservative their lreported evemost ls: Fundamentals prese v(1986). "other" recent estatistically sting and rvation more increase Specific uses might of . For to a plans workers that A 130nly with "career-average" canpensions 7.1 provide million is fully mainly LSD type portable of recipients attributable defined benefits, benefit reported tosome superior plan, the of which amount the nonpension reported bases they benefits portability received. compensation onAll losses average totals received could have grown from $6,800 to between $13,900 and $19,800 by age 65, after /continued) further retirement 11Ai I 1983 income data are gains taken from from enhanced Atkins (1986). preservation. instruments enhance significant of simulations Employee retaining 19So the at Benefit employees were me (e.g., retirement there 90 run sear Programs, stocks, percent for ch and security ers Andrews' money rewarding be fourth level. lieve ofmarket study ed. workers thlong at(Washington, this by accounts)" service. effect Clark receiving and is Therefore, n DC: (reported preretirement egligibl McDermed EBRI, e.both by 1990), See 6(1987). might lump percent footn and have o sums te Frank in 1. a . 1988). discussion salary would and aggressive common retirement averages be over 20See at offset of security strategies a pension-covered worker's the reported Davis if these 1983 might are, (1989). entire here findings, supplemental decline. respectively, are jobs career, for see rather those is Andrews benefits generally common than recipients to are (1985) pension stock, not preserved. who back-loaded. and 27 reported losses percent Atkins from the (1986). Under or amount. mobility 51 this percent; . plan, 90- a inflation. 3 32 23 18 26 25 28 lO 1 34 35 38 17 29 19 11 24 22 33 2 14 12 37 16 20 21 30 15 13 37 36

Volume T-75

Pages 40

EBRI Testimony

July 27, 1990

Joseph Piacentini

Financial Wellbeing Retirement