The critical decision an employee makes on receipt of a lump-sum
distribution (LSD) is whether to roll over the distribution to
another tax-qualified retirement savings vehicle or to cash out
the distribution for current consumption. In order to be an effective
mechanism for preserving retirement income, LSDs must remain as
retirement assets. This Issue Brief examines trends in LSD availability,
utilization, and magnitude.
In 1983, 47.8 percent of retirement plan participants reported
the availability of a LSD, compared with 71.5 percent in 1993.
Lump-sum availability has increased in both defined contribution
and defined benefit retirement plans.
In 1983, 55 percent of all individuals reporting a previous pension
benefit also reported a cashout LSD. This propensity dropped to
50 percent in 1993. So while the availability of LSDs has increased,
the propensity to choose a cashout LSD has fallen. The decrease
in the propensity for cashouts is concentrated primarily among
individuals earning more than $30,000.
The percentage of cashouts larger than $5,000 increased from 13
percent in 1983 to 19 percent in 1993. A possible explanation
for this increase is that typical account balances are becoming
larger. Another possibility is that cashouts are coming from the
larger accounts in plan participants' later years relative to
their early years.
The overall median cashout actually declined from $2,320 in 1988
to $2,000 in 1993. Younger workers, i.e., those under age 40,
experienced a slight increase in their typical cashout levels.
Workers in the accumulation phase of their careers, i.e., aged
40-55, actually experienced a large decline in the size of the
typical cashout LSD from 1988 to 1993.
The only category that experienced a large increase in the size
of the typical cashout LSD was workers aged 61-65. However, if
the goal is to assess the impact of cashouts on retirement income
adequacy, this fact is hardly distressing, given the age category.
The real danger of pension erosion occurs during job turnover
at a younger age. Furthermore, the main concern for pension erosion
is centered on lower wage workers, and the typical cashout levels
of workers who earn less than $40,000 were either relatively flat
or decreased from 1983 to 1993.
