Defaulting In and Cashing Out?

The Impact of Retirement Plan Design on the Savings Accumulation of Separating Employees

by Angela A. Hung, Jill E. Luoto, Jeremy Burke

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The shift to defined contribution (DC) retirement savings plans among employers has given both more freedom and more responsibility to employees who must decide whether and how much to save for retirement. Importantly, DC plans allow employees to decide what to do with their accumulated savings at points of job separation. While the advent of automatic enrollment (AE) policies has helped increase overall participation rates in DC plans, little consideration has been given to the interplay between the rise of AE policies and what happens to accumulated retirement savings at points of job separation. We use administrative data from Vanguard covering the accounts of over a half million participants from 385 plans to explore the participation and distribution decisions of those who separate from their employers. We find that job separation is a significant source of leakages from retirement accounts among our sample. Over 50 percent of separating employees take a cash distribution. Notably, even after controlling for income and account balance size, those separating from AE plans are significantly more likely to take a cash distribution than are those separating from plans in which they enrolled voluntarily. Though AE policies may help encourage retirement savings among those who otherwise would not save, such policies may fail to realize their full potential if savings accumulated during periods of employment effectively dissipate at points of job separation, and with taxes and penalties paid out in some cases.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Previous work on job separation and retirement savings

  • Chapter Three

    Vanguard administrative data

  • Chapter Four

    Results

  • Chapter Five

    Discussion

  • Chapter Six

    Conclusions

This paper series made possible by the RAND Center for the Study of Aging and the RAND Population Research Center.

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