Human Capital & Careers

Most 401(k) Job Changers Fail to Roll Over

AARP report says 60 percent of 401(k) participants who change jobs take cash payments.
CFO.com StaffMay 23, 2001

Sixty percent of 401(k) participants who change jobs take cash payments rather than roll their balances over into their new employers’ plan or an IRA, says a new report by AARP on people aged 50 and over.

That figure contrasts sharply with that of a survey by Putnam study announced yesterday. The Putnam study of 1,500 Americans who hold retirement accountsfound that about 30 percent of those with balances take cash payments.

The study, “Beyond 50–A Report to the Nation on Economic Security,” is based on U.S. census data and other information spanning 20 years, according a release issued by AARP.

Pension coverage for pre-retirees has not increased in two decades, and risk has been sifted to workers and retirees due to the shift from defined benefit to defined contribution pension plans, the release notes. Pension participation rates have declined slightly in every age group since 1980.

Just over one-third of those over age 65 have pension income, and just over half of pre-retirees have pension coverage. Those figures that have changed very little since 1980, AARP notes.

“Americans age 50 and over are ‘unquestionably’ better off financially than people the same age were 20 years ago,” AARP says in a release on the report.”Yet, there are troubling signs that not all boats have been lifted by the rising tide of prosperity – and not all boats will stay afloat.”

Based on the report’s findings, AARP is proposing a change in the traditional idea of the “three-legged stool” of retirement security, which includes Social Security, private pensions and personal savings.

Instead, AARP calls for a foundation for retirement that includes four supporting “pillars”–Social Security, pensions and savings, earnings, and health insurance.

The report combines pensions and savings as one pillar because today’s employer-sponsored pensions, which are most often in the form of 401(k)s or other kinds of “defined contribution” plans, are generally indistinguishable from individual saving, AARP.

Pension participation rates have declined slightly for pre-retirees and other age groups in the past 20 years, probably in part because the newer defined contribution plans offer employees a choice whether or not to take part.

The report also finds that the income gap between retirees and pre- retirees has diminished. Retirees’ incomes grew more than twice as fast as pre-retirees’ incomes since 1980.Wealth also grew at a more robust pace among retirees than among pre-retirees.

But inequality of income and wealth increased, AARP says. Incomes grew faster among the top quarter than the bottom quarter, and wealth disparities widened.

Four in ten Americans over age 60, regardless of their current economic circumstances, will experience poverty at some point in their later lives, according to AARP, a Washington-based non-profit organization for people over 50.

Health care coverage has decreased among people age 50-64 since 1988, according to the report. Those with Medicare coverage (age 65+) spend nearly one-fifth of their income on health care. This situation is worsened by declines in health and the rising cost of health care, says AARP.

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