Retaining Retirement Savings from Job to Job

Research from the Employee Benefit Research Institute (EBRI) reveals that more employees are preserving their retirement savings as they change jobs.

A recent analysis from the Washington, D.C.-based EBRI indicates that the preservation of retirement benefits appears to have improved between 1986 and 2012. In addition, more employees who spent their retirement savings used it to improve or enhance their financial situation, choosing to pay down debt or buy a home, rather than on pure consumption.

Using U.S. Census Bureau data, EBRI analyzed how employees take lump sum distributions from their retirement plans when they change jobs. When retiring or changing jobs, a person has options for their retirement account such as:

  • Leaving the money in their current plan;
  • Rolling it over to another tax-qualified savings vehicle, such as another employer-sponsored plan or individual retirement account (IRA);
  • Cashing it out to spend or invest in a different manner than through a tax-qualified savings vehicle; or
  • Some combination of the above choices.

“What workers choose to do with their retirement plan assets upon job change can profoundly affect their financial resources in retirement, particularly in the case of younger workers and those with large balances,” says Craig Copeland, senior research associate at EBRI and author of the report. “While improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their balances on job change, this behavior varied significantly across participants’ ages at the point of distribution and the amount of the distribution.”

The EBRI research notes 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. Well over four in 10 (45.2%) of those who received their most recent distribution through 2012 did so. This is compared with 19.3% of those who received their most recent distribution through 1993 and 35.4% through 1998.

Just 7.5% of recipients whose most recently received distribution came in 2012 spent the money entirely on consumption. This is compared with 22.7% for those who received a distribution through 1993 and 15.1% through 2003.

As to what plan sponsors should do in light of these findings, Copeland told PLANADVISER that these new employees should be encouraged to participate in their current employer’s retirement plan.

“While more assets are good for the plan as a whole, the main benefit of participation for employees is the ability to consolidate their portfolio, which may be scattered in separate retirement vehicles,” Copeland says.

He added that this centralization of investments can also provide employees with better guidance on what to do with their money, since the advice for handling a single, large balance could be substantially different than what to do with multiple, smaller balances.

In terms of whether plan sponsors need to step up efforts to educate employees about what their retirement plan and investment options are, Copeland says employees coming in with balances from other plans have money that needs to be managed.

"These employees need to know all the options that will help them with successful financial planning and a successful future,” Copeland says.

With regard to whether plan sponsors need to provide employees with better access to online guidance and investment advice, Copeland says delivery of such tools online seems better suited to younger employees, who have more trust in them.

"Older participants seem to prefer face-to-face meetings and print materials," Copeland says. "In any case, employees must understand that they will need to build a nest egg that will last them throughout their retirement.”

Copeland adds that the more specifics that plan sponsors can show employees, especially in terms of personalized goals and advice, the better. Participants are more comfortable saving, he says, the better they understand the investment process.

More information about this research can be found under the title “Lump-Sum Distributions at Job Change, Distributions Through 2012,” which appears in the November EBRI Notes on the EBRI website.