EBRI Issue Brief

Lump Sum Distributions: Fulfilling the Portability Promise or Eroding Retirement Security?

Oct 1, 1996 16  pages


  • 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.