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

Author

Listed:
  • 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.

Suggested Citation

  • Alicia H. Munnell & Jamie Lee, 2004. "Changing 401(k) Defaults on Cashing Out: Another Step in the Right Direction," Just the Facts jtf_12, Center for Retirement Research.
  • Handle: RePEc:crr:jusfac:jtf_12
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    File URL: http://crr.bc.edu/briefs/changing-401k-defaults-on-cashing-out-another-step-in-the-right-direction/
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    More about this item

    Keywords

    pensions; 401(k); shift;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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