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What Drives Retirement Rollover Decisions When Workers Leave a Job

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What workers do with their employer-based retirement savings accounts when they change or leave jobs largely depends on whether they retire or stay in the work force, according to a just-released report by the Employee Benefit Research Institute.

EBRI’s analysis — which was based on 2008 and 2010 data from the Health and Retirement Survey (HRS) and focused on the financial behavior of job changers older than 50 — found that among those still in the labor force, the most common outcome was to leave it in the previous employer’s plan, while among those who retire, the most common choice was to take the money.

However, EBRI’s report, “Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” also found that other factors also play a role in influencing workers’ choice.

For instance, the report found that a decision to take a cash withdrawal of accumulated savings declined with higher account balances, higher incomes, existing ownership of an individual retirement account (IRA) and higher financial wealth, while the decision to take a cash withdrawal rose with debt levels.

In contrast, the decision to roll over a DC distribution (typically from a 401(k) to an IRA) is “the mirror image of the characteristics influencing cash withdrawals: Rollover decisions increased with higher account balance, higher income, previous ownership of an IRA account, and greater financial wealth. They also declined with higher debt.”

Sudipto Banerjee, EBRI research associate and author of the report, cautioned in a statement that there is “no clear trend with respect to those variables and whether workers decide to leave their retirement balances in the prior employer plans.”

This suggests, he continued, “that there may be behavioral factors — such as inertia — driving what in some cases might be seen as a ’non-decision.’” Additionally, “those who are postponing the distribution may simply be deferring the decision until they need the money.”

Deciding what to do with a 401(k)-type retirement plan is one of the biggest issues a worker will face. The report cites that a “poor decision” would be, for example, withdrawing the money prior to age 59-½, which results in a 10% penalty in addition to income tax on that distribution. This choice “could reduce their retirement assets significantly,” the report states.

While rolling the assets to an IRA is a common way to preserve the savings, the study notes, this could also bring with it “higher investment and/or administrative costs than a 401(k) plan.”

Indeed, detecting IRA rollover abuse has become a focus for both the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

IRA guru Ed Slott told ThinkAdvisor in a recent interview that it behooves advisors to educate themselves on the six options that workers can choose from when retiring or shifting jobs.

“I’d say over 90% of advisors” don’t know the six options available to workers “because mostly they [advisors] begin their careers as salespeople,” and “because advisors are not trained on the tax rules — all they know is a rollover,” Slott said.

While capturing boomers’ rollover dollars is the “opportunity of a lifetime for advisors,” Slott said, advisors who fail to beef up their knowledge about helping their clients — particularly boomers — enter the distribution phase of their retirements will likely face outright loss of those clients and a failure to bring on new ones.

Of the six choices available to workers when leaving a job — roll over to an IRA, leave it in the company plan or roll to a new company’s plan, take a lump-sum distribution, make a Roth conversion or an in-plan Roth conversion — Slott said that the right choice depends on the participant’s circumstances, but “the best option is still usually the IRA rollover, to be fair to advisors.”

However, Slott warned that “there are situations where you have to ask questions, and this is where advisors need to be better educated on the options.”

Check out Time to Rein In Rollovers? on ThinkAdvisor.