Lump-Sum Distributions at Job Change

January 2009, Vol. 30, No. 1
Paperback, 12 pp.
PDF, 346 kb
Employee Benefit Research Institute, 2009

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Executive Summary

GROWING NUMBER OF WORKERS FACED WITH ASSET DECISIONS AT JOB CHANGE: With 401(k)-type retirement plans now dominant and “traditional” pensions offering lump-sum distributions at retirement, a growing number of workers are faced with making decisions about what to do with the assets they have earned in their employment-based plans when they change jobs. After leaving employment with a retirement plan sponsor, the worker has three choices for his or her retirement account: Leave the money in the plan, roll it over to another tax-qualified savings vehicle, or cash it out.

RETAINING RETIREMENT ASSETS AT JOB CHANGE A MAJOR ISSUE: Workers’ future financial adequacy in retirement can be profoundly affected by whether their lump-sum distributions at job change are cashed out or retained in another savings vehicle. This is particularly the case for younger workers and those with large balances. This article uses 2006 data (the latest available) from the Census Bureau’s Survey of Income and Program Participation (SIPP) to analyze the decisions made by workers at job change when they receive a lump-sum payment from an employment-based retirement plan.

AVERAGE AND MEAN DISTRIBUTIONS: About 16.2 million working-age Americans reported ever having received a lump-sum distribution from a retirement plan when changing jobs, through April of 2006. The average amount of these distributions was $32,219 (in 2006 dollars) and the median (mid-point) amount was $10,000.

MOST DISTRIBUTIONS GENERALLY SMALL: For the most part, the amounts of the lump-sum distributions were relatively small—just over 21 percent of the distributions were less than $2,500. Just over 16 percent were $50,000 or more. The rest of the distributions (about 63 percent) were between $2,500 and $50,000.

ROLLOVER TRENDS ARE MIXED: The data show that an increasing percentage of retirement plan participants are rolling over all of their lump-sum distributions on job change, and fewer are spending any of their distributions on consumption. However, the data also show that approximately 60 percent of those who took a lump-sum payment did not roll all of it into tax-qualified savings, although not all of those distributions were spent exclusively on consumption but instead were used for home purchases, starting a business, or paying down debt. This behavior varied significantly across participants’ ages and the amount of the distribution, with older individuals (up to age 65) and those with higher balances more likely to roll over their assets.

YOUNGER WORKERS MOST AT RISK OF SPENDING THEIR LUMP-SUM DISTRIBUTIONS: The data suggest that many workers, particularly younger ones, do not understand or value the fact that a small amount of savings can make a significant impact on retirement assets due to compound interest. By cashing out even small amounts, younger participants are sacrificing a potentially important asset for their retirement.