In 2014, many plan sponsors offered vested, terminated participants the option of electing a lump-sum distribution in lieu of waiting until retirement to collect their pension benefit. These offers provide participants the opportunity to manage their retirement assets to suit their individual needs. For sponsors, these offers are excellent pension risk management opportunities that result in lower plan liabilities, better balance sheet control, and lower participant counts that translate into lower PBGC premiums and plan administration costs. The continuing rise in PBGC premiums and the eventual incorporation of new mortality tables into lump-sum calculation regulations in 2017 make these offers attractive for 2015 and likely 2016.
These offers do create some peril for sponsors and their participants. The participants must be given the option of taking their distributions in cash; they cannot be compelled to roll over their lump sum to an individual retirement account or another qualified plan. Sponsors set up these plans to provide for their employees' retirement, not to fund midlife needs. This issue prompted a Government Accountability Office report that recommended more information be given to participants who are allowed to elect a lump-sum benefit. The GAO is concerned that participants don't really understand the deferred monthly income they are giving up in order to get the immediate lump sum. This article explores several lessons we can learn from participant behavior when offered a lump-sum cashout. Understanding the behavior of participants will help sponsors make better decisions on whether to make these offers and how to communicate with their vested, terminated participants.
P-Solve and Nyhart combined forces and aggregated data from 18 cashout windows representing close to 3,500 participants. The good news is that most vested, terminated participants roll over their cashouts. However, many near retirees are taking the money and running!
What do the data show?
Just over half (51%) of the participants elected to take a lump sum. Only 1% took the immediate annuity benefit that also must be included with these offers. All of these annuity takers were over age 50. Sponsors can expect “take rates” of between 40% and 60% on these offers and do not need to worry about the immediate annuity option being elected by young folks.
The good news is that participants with higher lump-sum amounts that elected a distribution tended to roll over their distribution into an IRA or another qualified retirement plan. The bigger the lump sum, the more likely participants are to roll over their money. Interestingly, the likelihood of doing nothing is only slightly higher with larger lump sums than smaller lumps sums, indicating that inertia is an issue regardless of amount. The chart below shows the comparison of those participants who took their distribution in cash vs. a qualified plan rollover by lump-sum amount.