New research from the Employee Benefit Research Institute (EBRI) focusing on the financial behavior of job changers over age 50 finds that, among those still in the labor force, the most common decision when leaving an employer was to leave 401(k) assets in the previous employer’s plan. Conversely, those who retire from the work force and stop working tend to either take a cash distribution or roll the money into an individual retirement account (IRA).
However, the EBRI analysis shows that a number of other factors also play a role in influencing the choice for any particular worker. For example, the decision to take a cash withdrawal of accumulated savings declined with higher account balances, higher incomes, existing ownership of an IRA and higher financial wealth, according to EBRI. On the other hand, the decision to take a cash withdrawal rose with debt levels.
The decision to roll over a defined contribution (DC) distribution (typically from a 401(k) to an IRA) is the mirror image of the characteristics influencing cash withdrawals, EBRI explains. In other words, rollover decisions increased with higher account balance, higher income, previous ownership of an IRA account, and greater financial wealth. They also declined with higher debt, EBRI says.
Sudipto Banerjee, EBRI research associate and author of the report, cautions, however, that there is no clear trend with respect to these variables and whether workers decide to leave their retirement balances in the prior employer plans.
“This suggests that there may be behavioral factors—such as inertia—driving what in some cases might be seen as a ‘non-decision.’ Additionally, those who are postponing the distribution may simply be deferring the decision until they need the money,” he explains.
As the report points out, one of the most important decisions that workers with 401(k)-type retirement plans face is what to do with the money in their account when they switch jobs or retire. EBRI says a poor decision on this matter—for example, withdrawing the money prior to the minimum required age, which results in a 10% penalty in addition to income tax on that distribution—could reduce a worker’s retirement assets significantly. Rolling over the assets to an IRA is a common way to preserve the savings, EBRI says, even though doing so may also bring higher investment or administrative costs than a 401(k) plan.
EBRI’s analysis is based on 2008 and 2010 data from the organization’s Health and Retirement Survey, a study of a nationally representative sample of U.S. households with individuals age 50 and over. The full report, “Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?,” is published in the May 2014 EBRI Notes and is available online at www.ebri.org.