More participants in employment-based retirement plans are rolling over their lump-sum distributions into another account upon leaving a job, and fewer are spending those distributions on new consumption, according to a study conducted by the Employee Benefit Research Institute.
The study shows that some individuals do, in fact, retain their retirement savings.
"The goal of retirement savings plans such as 401(k) is to provide income for individuals in their retirement," the report said. "For this to happen, participants in these plans must preserve their benefits until retirement by retaining any existing plan balance on job termination."
The decision whether or not to use up retirement savings from a previous job really affects a participant's financial resources in retirement, especially with young workers, who change jobs more often, the study revealed. For example, a 25-year-old who changes jobs after having accumulated $5,000 would have $24,000 at the age of 65, assuming that a constant 4% rate of return compounded each month.
Forty-three percent of lump-sum recipients who received their latest distribution through 2003, transferred all of their distributions in tax-qualified plans such as IRAs or other employment-based plans, up from 19.3% through 1993. On the other hand, 25.2% of lump-sum recipients who got their most recent distribution through 2003, used any portion for new consumption, and this was down from 38.3% through 1993.
One possible explanation for the increase in the number of participants rolling over retirement distributions from one tax qualified plan to the next was the 20% Federal withholding tax that was imposed on distributions not directly rolled over after 1993, the study revealed.
The EBRI study was based upon information provided by the 2003 Census Bureau data.