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Report: Plan Rules Influence Distribution Behaviors

A new report looks at retirement distribution, and uncovers some interesting trends.

In the aggregate, the Vanguard report, “Retirement distribution decisions among DC participants — An update,” notes that most retirement-age participants and most participant assets leave employer plans within five calendar years following the year of termination of employment. After three years, about 3 in 10 participants remain in the plan; but after five years fewer than one in five participants do.

First, the financial crisis in 2008 and 2009 did not appear to trigger a surge in withdrawals or to have had an impact on the distribution decisions made by retirement-age plan participants — a finding that the authors of the report said had implications for the “to versus through” debate in target-date fund design.

Second, the report notes that participant behavior does appear to be affected by plan rules on partial distributions. However, only 13% of plans allow terminated participants to take ad hoc partial distributions, and these tend to be larger plans.

Consider that, looking at a 2014 termination year cohort, the researchers found that two-thirds of retirement age participants had preserved assets in a tax-deferred account. Just 2% of participants remained in the plan that offered no installment option; 7% remained in the plan that offered installment payments; and 57% completed an individual retirement account (IRA) rollover. Four percent of assets remained in the plan with no installment payments; 12% of assets remained in the plan with installment payments; and 72% of assets rolled over to an IRA.

Third, and finally, the report cited independent survey data from the Employee Benefit Research Institute (EBRI), Investment Company Institute (ICI) and a study by Poterba, Venti, and Wise that found “little evidence of widespread withdrawal behavior from IRAs for participants prior to the RMD age.”

It seems, therefore, that participants do not seem to be erratic in their withdrawal from these accounts, but that plan design — specifically plan design that doesn’t allow for installment distributions — serves to encourage lump sum distribution activity.

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