While each situation is different, in my experience leaving a job brings with it nearly as much paperwork as joining a new employer does. Granted, you’re not asked to wade through a kit of enrollment materials, and the number of options is generally fewer, but you do have to make certain benefits-related decisions, including the determination of what to do with your retirement plan distribution(s).
Unfortunately, even in the most amicable of partings, workers have traditionally lacked the particulars to facilitate either an IRA or a subsequent employer’s retirement plan – and thus, the easiest thing to do was simply to request that the distribution be paid out in cash.
Over the years, a number of changes have been made to discourage the “leakage” of retirement savings at job change, including:
• thresholds for mandatory distributions;
• a requirement that distributions between $1,000 and $5,000 on which instructions are not received are either rolled over into an IRA or left in the plan; and
• the requirement that a 20% tax withholding must be applied to an eligible rollover distribution unless the recipient elects to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA.
All these steps have doubtless served to at least give pause to that individual distribution “calculus” at job change.
Indeed, a recent EBRI analysis indicates that those now taking a retirement plan distribution are doing a better job at holding on to those retirement savings than those who took distributions in the past. Among those who reported in 2012 ever having received a distribution, 48.1% reported rolling over at least some of their most recent distribution to tax-qualified savings. Among those who received their most recent distribution through 2012, the percentage who used any portion of it for consumption was also lower, at 15.7% (compared with 25.2% of those whose most recent distribution was received through 2003 and 38.3% through 1993).
As you might expect with the struggling economy, there was an uptick in the percentage of recipients through 2012 who used their lump sum distributions for debts, business and home expenses, and a decrease in the percentage saving in non-tax-qualified vehicles relative to distributions through 2006. However, the EBRI analysis found that the percentage of lump-sum recipients who used the entire amount of their most recent distribution for tax-qualified savings has increased sharply since 1993; 45.2% of those who received their most recent distribution through 2012 did so, compared with 19.3% of those who received their most recent distribution through 1993.
There is both encouraging and disappointing news in EBRI’s findings. The data show that improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their lump sum distributions upon job change, along with less frequent pure-consumption use of any of the distributions. However, the data also show that approximately 55% of those who took a lump-sum payment did not roll all of it into tax-qualified savings.
In common parlance, “take it or leave it” is an ultimatum — an “either/or” proposition that frequently comes at the end of a decision process, not the beginning. However, as the EBRI analysis indicates — and as retirement plan advisors know — for retirement plan participants it is a decision that can have a dramatic impact on their financial futures, especially for younger workers or those with significant balances.
