Cash is still tempting for more than a third of participants
When retirement plan participants leave their employer, for whatever reason, they have a choice to make: Leave their money where it is, move to another employer’s plan, move to an IRA, or take the cash.1 The good news? We found that more than half of our participants who left their DC plans moved their money directly to an IRA or a new employer’s DC plan.
After excluding participants who may have been cashed out of their plan because of a low balance, there were still 39% who took a cash distribution. This, in turn, exposed them to immediate tax liability, possible tax penalties, and a step backward from their retirement goals. We hear from our call center specialists that many people think they must take the money out—which means there’s an opportunity for education, both at the point of departure and throughout their time in the plan.
What participants of all ages who departed their DC plans in 2021 did with their distributions
Excludes accounts under $5,000.
Among those 60 and older, distribution decisions were better but left room for improvement
As participants approach retirement age, many have learned the value of retaining tax-deferred status for their savings and other potential advantages of a rollover. Their choice of rollover vehicles—65% to IRAs and 4% to a new employer’s plan—reflects the fact that many participants in this age group are departing for retirement rather than for another full-time job. However, taking their balance in cash is still a taxable event, unless they subsequently roll it into an IRA or another qualified plan within the 90-day window provided under federal tax laws.
Where older participants leaving DC plans in 2021 transitioned their savings
Excludes accounts under $5,000.
What can we do to help shape better transition decisions?
At some point, every retirement plan participant will leave their employer and need to decide what’s best for their retirement savings. There are several ways plan sponsors and financial professionals can help transitioning employees make the right call when the time comes.
Help new participants see a step ahead—As part of the enrollment and onboarding process, provide education on how to help keep retirement savings growing from job to job and, ultimately, into retirement.
Ensure that in-plan consolidation is as simple as possible—If your plan accepts rollovers, ensure that new and veteran participants understand the potential advantages of keeping their savings in one place. Offer education and one-on-one help with the roll-in process, including guidance on how to approach a consolidated investment portfolio.
Make educated transitions a hallmark of your plan—Given all you’ve invested in offering a competitive retirement program, don’t fall short of the goal line. Take a systematic and measurable approach to ensuring that departing participants understand the options for their savings. Provide in-depth online support for those who want to research and compare the approach that works best for them. And consider making high-quality rollover IRA options available for participants who may be looking for a recommendation.
Design smooth transitions into your plan—When employees leave the company, they often believe they have to take all their money out of their plan. You can help, not only with communication and education, but also with a plan design that makes the transition smoother. A couple features to consider:
1 Allow partial distributions so that those participants who do need some cash don’t have to empty their savings.
2 Enable terminated participants to continue paying back their loans so they have less risk of having to default on a plan loan.
It’s all about education
Retirement plan education often focuses on in-plan behavior—like saving more and how to invest—but it’s also important to let people know about the options they have when they leave the plan. Years of saving can be derailed by taxes and penalties triggered by poorly informed choices.
Transitions are good opportunities to help both retirees and job changers protect and make better use of their retirement savings. And by helping to ensure that transitions go well, you can demonstrate your value as well.
For more insight into how plans are designed and participants are progressing, read our State of the participant 2022 report.
1 There are advantages and disadvantages to all rollover options. Participants are encouraged to review their options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for them.
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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