Choices and Information Needs for Workers Leaving the North Carolina State Retirement Plan

Accepting a Lump Sum Payment or Receiving an Annuity at Retirement

by Robert Clark, Melinda Sandler Morrill

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When a worker who is covered by a defined benefit retirement plan terminates employment prior to retirement, in many cases she may choose to either leave her money in the pension plan or accept a lump sum distribution of pension assets. This choice can have significant long run implications for future retirement income. This project examined all terminations from state and local government employment in North Carolina between 2000 and 2009 for workers who participated in either the North Carolina Teachers' or State Employees' Retirement System (TSERS) or the Local Government Employees' Retirement System (LGERS). The researchers provide evidence on which separating employees accepted a lump sum distribution. For those workers that chose to withdraw their funds, the researchers then investigate the choice of directly accepting the distribution versus having the monies deposited in another retirement account, such as an IRA. Younger workers are more likely to accept lump sums as are those with fewer years of service and lower incomes. In addition, women are more likely to leave their monies in the retirement system than men, and participants in TSERS are more likely to retain their funds in the system compared to those in the LGERS. Workers were significantly less likely to withdraw funds upon separation after a substantial change the method of delivering information was implemented in 2007. The findings of this Quick Turnaround Project provide unique and important information concerning the decisions to accept a lump sum distribution from a defined benefit plan.

The research described in this report was prepared for the Social Security Administration and conducted by the Financial Literacy Center.

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