This Issue Brief analyzes data provided by Hewitt Associates regarding lump-sum distributions and benefit preservation, with a particular focus on trend analysis and data breaks by distribution size and recipient age.
Forty percent of distributions to job changers were rolled over into other qualified retirement plans in 1996, up from 35 percent in 1993. Rollover percentages are higher when examined by the dollars distributed, reflecting the fact that larger distributions are more likely to be preserved. Seventy-nine percent of all dollars distributed in 1996 were rolled over, compared with 73 percent in 1993.
In 1996, 20 percent of distributions of less than $3,500 were rolled over, compared with 95 percent of distributions over $100,000. The findings for dollars distributed are analogous: among distributions of less than $3,500, 27 percent of the dollars were rolled over, while among distributions over $100,000, 96 percent of the dollars were rolled over. The likelihood of rollover is also positively correlated with recipient age.
From a retirement income security perspective, there is good news in these data. The propensity to roll over lump-sum distributions has been increasing, and over three-quarters of the dollars distributed are preserved via rollover.
At the same time, the data indicate areas of shortfall. Most distributions are not rolled over: among job changers, 60 percent of distributions were cashed out in 1996. It can be argued from a financial planning perspective that even relatively small sums can compound into nontrivial contributions to a retirement nest egg over a period of decades. Furthermore, the importance of preservation of seemingly small balances is enhanced by the fact that individuals may receive a number of these "small" distributions over the course of a career.
The Hewitt data also allow analysis of distributions to those who retired or became disabled. In 1996, 52 percent of distributions to retired or disabled individuals resulted in a rollover, and 87 percent of the dollars distributed were rolled over. Unfortunately, the data allow no further analysis concerning the ultimate uses of these funds, especially with regard to annuitization.
