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Changing 401(k) Defaults on Cashing Out: Another Step in the Right Direction

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Author Info

  • Alicia H. Munnell

    ()
    (Center for Retirement Research at Boston College)

  • Jamie Lee

    ()
    (Center for Retirement Research at Boston College)

Abstract

Over the last 20 years, pension coverage has shifted from defined benefit plans, where benefits are based on years of service and final salary and generally paid as an annuity, to 401(k) plans, where individual and employer contributions and earnings on those contributions are awarded as a lump sum at retirement. Although the majority of workers lucky enough to have a pension will rely on a 401(k) plan, these plans are coming up short. The main reason is that 401(k) plans shift all the risks and decision-making from the employer to the individual, and individuals make mistakes all along the way. One of the most serious mistakes occurs when young people cash out small pension accounts upon changing jobs. The regulation issued today from the U.S. Department of Labor with regard to provisions in the 2001 Economic Growth and Tax Relief Reconciliation Act should help solve the “cash out” problem.

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Bibliographic Info

Paper provided by Center for Retirement Research in its series Just the Facts with number jtf_12.

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Length: 4 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:crr:jusfac:jtf_12

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Related research

Keywords: pensions; 401(k); shift;

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Cited by:
  1. Burman, L.E. & Coe, N.B. & Dworsky, M. & Gale, W.G., 2008. "Effects of Public Policies on the Disposition of Pre-retirement Lump-Sum Distributions: Rational and Behavioral Influences," Discussion Paper 2008-94, Tilburg University, Center for Economic Research.

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