To roll over or to withdraw? How employees deal with retirement accounts during job transitions
Pew Charitable Trusts study finds race, income, education and marital status all play a role in what employees choose to do with their retirement funds.
Much attention is focused on getting employees to join defined contribution plans and accelerate their contributions to prepare for a secure retirement, but not as much attention is paid to what happens when employees make career changes, including moving between employers or retiring.
How savers preserve, reinvest or spend their savings can make a big difference in how long those savings will last during retirement.
Consequences of employee decision
For example, rolling savings held in an employer-sponsored 401(k) to an individual retirement account could subject the funds to higher investment management fees than if they were left in the employer’s plan that typically has lower institutional fee arrangements, according to a new study by The Pew Charitable Trusts.
In another scenario, workers who take their accounts in a lump sum distribution when they switch jobs may find reasons to spend the cash, diminishing their savings for retirement, said Pew.
Common and uncommon behaviors
The study examines some common characteristics of people who either took money from their accounts or left their accounts untouched between 2014 and 2016. It includes employees over the age of 50 who took one or more actions affecting their defined contribution plan when changing jobs or leaving an employer.
Most commonly, employees rolled some or all of their plan balance into an IRA, representing about 31 percent of those studied. About one-quarter withdrew all of their funds, although the study noted some of those may have subsequently deposited those funds in an IRA.
Nearly the same percentage left some or all of the funds in their previous employer’s plan when allowed. Some employers require departing employees to close out their accounts, said Pew.
The least common action at about 20 percent was a partial or scheduled withdrawal or rolling the account into an annuity.
The study found that retirees took partial or full withdrawals or converted their balances to annuities more frequently than those who were still working.
However, workers who were only partly retired were more likely to withdraw their entire account balance than retirees. Those under the age of 59.5 would have had to pay a 10 percent early withdrawal penalty for doing so if they did not then roll it into an IRA, said Pew.
Those who were still in the workforce were more likely to leave their savings with their employer’s plan than retirees, the study found.
Demographics affect decision
Demographics also influence the choices employees make, said Pew. Rollovers to IRAs were more common among White respondents and those who had at least a bachelor’s degree, while Hipsanic and non-White/non-Hispanic respondents and those who had not completed college were more likely to withdraw their entire account balance.
Gender, however, did not seem to play a role in how employees disbursed their accounts, the study found.
According to Pew, higher levels of education can lead to higher incomes and more savings and wealth, which can translate into more options when faced with a financial shock such as job loss.
In addition, the study also speculated that higher levels of schooling also could mean greater exposure to financial concepts that can be helpful in retirement planning decisions.
Both of these variables may make it easier for those with high levels of education to find ways of dealing with unexpected expenses without drawing down their retirement savings.
Marital status has an important influence on decisions as well, the report found. Withdrawing all retirement savings was more common among those who were not married, including those who were never married or were separated, divorced or widowed. Those who were partnered or married more frequently rolled some or all of their savings into an IRA. The report attributed this dynamic to the financial pressure of living on one income.
Lower income households were three times more likely to withdraw all of their savings than households with incomes greater than $100,000. This may reflect rules allowing employers to cash out or transfer small accounts because of their administrative costs.
Other findings of the study noted that those who have high levels of unsecured debt, often credit card debt, more commonly withdrew their entire account balance than those with low or no unsecured debt and that those who had previously owned an IRA were more likely than those who had not owned an IRA to roll over their accounts.
Financial education needed
Pew suggested employers can play an important role in helping employees make beneficial decisions, including delivering more financial education at the point of decision and providing options that make keeping funds in a low-cost retirement account — whether with the employer or in an IRA — as easy as possible.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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