Lump-Sum Distributions: An Update

Abstract:     
An advantage of defined contribution plans is that the benefits can be retained and continue to grow when an individual changes jobs because the account balances continue to receive investments returns. However, this advantage will result in increased retirement savings only if plan participants do not cash out the benefits prior to retirement. This article assesses the likelihood that lump-sum recipients will cash out their benefit. The data clearly show that a growing percentage of retirement plan participants are holding on to all or part of their lump-sum distributions and fewer are spending their distributions on consumption. However, it was also found that approximately two-thirds of those who took a lump-sum payment cashed out at least some of it. The article concludes that more education and incentives are needed to make employees understand the importance of retaining these assets for retirement.

Number of Pages in PDF File: 16

Keywords: Employment-based Benefits, Lump-sum Distributions

JEL Classification: D31, J26

Accepted Paper Series