Skip to main content

You are here

Advertisement

Where Does the Money Go?

Practice Management

A new study answers the question, “What do workers do with their retirement savings after they leave their employers?” – and when?

To help plans better evaluate the distribution decisions people make when leaving employment, Alight Solutions takes a deep dive into the post-termination behavior of more than 2 million DC participants, examining what people do with their balances, what percentage of assets leaves the plan and how decisions differ by demographics.

Not surprisingly, as of year-end 2017, only about one-quarter of all workers who terminated employment between 2008 and 2017 kept their money in the plan. Four out of every 10 people cashed out their entire balance, while another 26% rolled their balances over to another qualified plan. The remaining 8% of individuals had a combination of distribution activities.

But with that said, a “starkly different picture emerges” when examining data on an asset-weighted basis rather than by headcount, the report notes. According to Alight’s findings, the percentage of assets that left the plan by year-end 2017 dropped to 60% and cash-outs accounted for only 15% of the total money.

Staying Put

In fact, the study shows that many people actually kept their money in the plan—especially individuals with larger balances. Among participants who terminated over the past 10 years, a sizeable 40% of assets remained in the plan as of year-end 2017, although that represented the balances of just 26% of the people who terminated over the last 10 years.

Alight explains that the discrepancy between the headcount and the asset weighting arises from the fact that people with smaller balances were more likely to cash out their benefits than people with large balances. What’s more, the firm notes there are many more people with small balances than with large ones.

According to the data, 80% of people with balances of less than $1,000 cashed out their entire balance, compared to only 2% of people with balances of $250,000 or more. In addition, individuals with balances of $1,000 or less outnumbered those with balances of $250,000 or more by a factor of more than 3 to 1.

Withdrawal Behavior

As one might expect, people were most likely to take a withdrawal soon after terminating, but the level eases somewhat over time. Noting that there has been “remarkable consistency” in the withdrawal behavior of participants over the past 10 years, Alight found that, within the year of termination, 55% to 60% of people took a withdrawal, either through a cash-out or a rollover. And in the year following the termination year, another 15% took action.

The report notes that all-in-all nearly three-quarters of participants took a distribution by the end of the calendar year following their termination date, but after two years participants became much less likely to start tapping their balances.

Installment Payments

Plan provisions that enable retirement strategies from DC plans apparently increased post-termination asset retention, the report further observes. Alight found that when installment payments were available as a distribution option, retirees kept more assets in the plan.

Retirees with larger plan balances were especially likely to remain in the plan:

  • 38% of people who terminated after reaching age 60 and who had a balance of at least $250,000 kept their money in the plan when installments were offered.
  • Yet, only 28% of these individuals kept their money in the plan when installment payments were not offered.

Alight notes that this finding makes intuitive sense: “People who have accumulated a large balance over their career with their employer’s DC plan may well have developed a high level of comfort and trust in that relationship.” Moreover, the study emphasizes that the stable value asset class is perhaps of greatest value to participants in retirement and those funds are available only in DC plans.

The study analyzed more than 2 million participants who terminated between 2008 and 2017, who together had account balances in excess of $100 billion.