receiving an immediate lump sum distribution Those that leave account open can request Those that are vested, can receive a

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1 Distributional Choices of State and Local Workers Leaving North Carolina State Retirement Plans Robert L. Clark Melinda Sandler Morrill North CarolinaState University

2 Pension Distributions for Separated Public Employees in NC Terminated employees have choice of receiving an immediate lump sum distribution or to leave pension account open Those that leave account open can request lump sum distribution at any time Those that are vested, can receive a retirement benefit once that have reached hdh the age of eligibility for a retirement benefit

3 Key Research Issues What plan characteristics influence thechoice of terminated employees? What individual factors explain the variation in the choice of pension distributions? Can financial i literacy and financial i information i affect these choices?

4 Job Separation and Distribution of Pension Assets in the Public Sector Participants in DBpension plans accrue credits toward a benefit in retirement Public sector pensions often require employee contributions i Vesting requirements typically 5 years or more

5 Departing workers have a choice Workers who are vested and are leaving public employment have a choice of leaving their funds in the plan and receiving a benefit upon reaching the age of eligibility or receiving a lump sum distribution. Non vested terminations can leave money in the system but will not be eligible for a future benefit.

6 Important Plan Characteristics Non vested workers who request a lump sum receive only their own contributions (without interest); if they leave money in system, they do not accrue any intereston their account. Vested workers who request a lump sum receive a distribution equal to their contributions plus a 4% interest. All vested workers who leave funds in system will be eligiblefor a future retirement benefitand retiree health insurance without having to pay a premium.

7 Key Questions Did the departing worker opt to accept a lump sum distribution as defined in the terms of the pension plan or did they leave their funds in the plan so as to ultimately receive a retirement annuity? Did the departing workers who withdrew the funds chose to directly accept the distribution or did they have the monies deposited in another retirement account such as an IRA? Are departing workers making different decisions after the introduction of additional financial information resources being provided to plan participants?

8 North Carolina State Retirement Plans The retirement system for public sector employees in North Carolina consists of the Teachers and StateEmployees Retirement System (TSERS) and the Local Government Employees Retirement System (LGERS). These two plans are administered by separate board of trustees with the State Treasurer being the sole fiduciary of both plans.

9 North Carolina State Retirement Plans The plans are very similar but not identical. The benefit formula for TSERS is 1.82 percent timesfinal average salary times years of service. The benefit formula for LGERS is slightly higher at 1.84 percent times final average salary times years of service. Final average salary (FAS) is defined as the highest 4 years of earnings in both plans.

10 North Carolina State Retirement Plans Each plan requires 5 year vesting and a 6.0 Each plan requires 5 year vesting and a 6.0 percent employee contribution rate. Normal retirement ages, the age at which a person can be receiving an unreduced retirement benefit, are: a. age 65 with 5 years of service b. age 60 with 25 years of service c. 30 years of service with no age requirement

11 Terminations 2000 to 2009 For this project, the retirement system produced a data file on all workers who becameinactive between2000 and The file includes information i on the employee s date of birth, gender, salary, and the retirement plan and public employer.

12 Distribution Data Thedata indicated whether a. the employee is currently receiving retirement benefits, b. whether the retiree took a lump sum distribution ib i upon separation, or c. whether the separating worker has left the funds in the plan and the account is still active.

13 Sample size Thebaseline sample includes 296, individuals who left the retirement systems during this period for whom we examined the distribution decisions. Of these, 81,240 retired within a year of terminating i employment.

14 Sample size This leaves a sample of 215,053 employees who left the system, were not eligible start retirement benefits, and thus had to decide whether to accept a lump sum distribution or leave their funds in the system. We further restrict our attention to separating employees that were younger than 50 years old, in order to more closely approximate a sample that is not eligible to immediately retire, which reduces the sample to 175,170 separated workers.

15 Percent separating employees age 18 to 49 accepting lump sum: Full sample: 45% Men: 49% Women: 43% Years of Service: less than 1 44% 1 to 4 50% 5 to 19 36% Over 20 17%

16 Percent separating employees age 18 to 49 accepting lump sum: Not Vested All 48% Men 52% Women 47% Years of Service less than1 44% 1 to 4 50% LGERS 53% TSERS 46% Vested All 35% Men 41% Women 32% Years of Service 5 to 19 36% over 20 17% LGERS 43% TSERS 32%

17 Percent accepting lump sum: 2000 to 2009 Not Vested Vested Size of Account: Less than $2,500 46% 38% $2,500 to $9,999 51% 45% $10, to $24,999 44% 36% $25,000 to $74,999 48% 25% $75,000 to $99,999 14% over $100,000 21%

18 Percent accepting lump sum: 2000 to 2009 Not Vested Vested % 17% % 21% % 37% % 50% % 49% % 41% % 36% % 30% % 31% % 27%

19 Regression coefficients takes lump sum: significant results Variable Not Vested Vested Male TSERS Age

20 Regression coefficients takes lump sum: significant results Variable Not Vested Vested

21 Receiving the lump sum Separating employees who request a lump sum distribution can either: take the money in cash or roll the money over into another tax qualified account 85% choose to take the cash

22 Receiving the lump sum Findings: 1. Over time more workers are taking the cash 2. Men are slightly l more likely l to accept cash 3. Nonvested TSERS participants are less likely to take the cash 4. Those with larger account balances are more g likely to roll the money over

23 Key Findings and Policy Issues 1. Slightly less than half of separating workers request a lump sum distribution 2. Menmorelikely than women to request lump sum as are local government employees and workers with fewer years of service 3. Those with ihlarger account bl balances are more likely to leave their funds in the pension

24 Key Findings and Policy Issues 4. Of those requesting a lump sum distribution, 85 percent wanted to receive the cash; over time the preference for cash increased. 5. After 2007, departing workers were significantly less likely to withdraw their funds from the pension. Was this due to improved information and consultation?

25 A puzzle Why don t all non vested terminating employees request an immediate lump sum? Money left in system earns not interest, but if one bli believes that they will return to public sector, prior service will count toward vesting and future benefits.

26 Another puzzle Why don t all vested workers leave their money in the system? Accepting lump sum distribution of only employee contributions i plus interest results in no future benefits and also the employee is not eligible ibl for retiree health h insurance.