Benefits August 4, 2005

What Are Participants Doing With Lump Sum Distributions?

August 4, 2005 (PLANSPONSOR.com) - An updated report issued by the Congressional Research Service (CRS) says that 84% of respondents who had received a lump sum distribution from their retirement plan had saved all or some of their distribution dollars.
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Forty four percent said that they had rolled over the entire amount of their most recent distribution into an IRA or other retirement plan and another 40% of recipients said that they had saved at least part of the distribution in some other way, according to data collected by the Census Bureau included in the updated report.

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Nine of the methods participants used to save retirement money fit into the standard economic definition of saving, including:

  • Investing in an IRA, annuity, or other retirement program
  • Investing in a savings account or certificate of deposit
  • Investing in stocks, mutual funds, bond, or money market funds
  • Investing in land or other real property
  • Investing in a family business or farm
  • Purchasing a home, paying off mortgage, or making home improvements
  • Paying bills, paying off loans or other debts

The inclination to spend, rather than roll over their retirement plan distributions hasn’t changed much since data was collected from the Census Bureau in 1998, according to the report. In 1998, 42.4% of respondents who had received a lump sum distribution within the past five years said they had rolled over the full distribution into another tax-deferred retirement plan. In 2003, 45.8% said so.

The report indicated that younger workers are more likely to spend their lump sum distributions than older workers, a similar finding to other surveys (See Hewitt: K Plan Cashouts Still Common ). A typical 25-year-old today will work for seven or more employers before reaching age 65, and could receive several distributions before reaching retirement age. If the person is spending the money rather than saving it, their future retirement income could be jeopardized.

The CRS reported on the amount of retirement wealth lost as a result of workers spending their retirement money. If the median lump-sum distribution ($6,000) received through 2002 that was not rolled over had instead been rolled over into an account that grew at the same historical rate as the Standard & Poor’s 500 Index, it would have had a median value of $7,214 by 2003. According to the report, if this amount were to remain invested, it would grow to an estimated value of $31,100 by age 65.

Administration August 3, 2005

Oregon High Court Issues Mixed Ruling on PERS Reforms

March 8, 2005 (PLANSPONSOR.com) - The state of Oregon's high court has thrown out two legislative pension reform measures, including a minimum earnings guarantee for veteran government employees and the halting of certain cost of living adjustments (COLA).
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The high court’s 92-page ruling Tuesday represents the latest chapter in a long-running saga in which Oregon officials have struggled to fix the state’s Public Employee Retirement System (PERS). The court consolidated six originally separate challenges to the pension reforms enacted by the 2003 Legislative Assembly (See  Oregon Lawmakers OK Reformed Public Pension Plan ).

With both the minimum earnings guarantee and cost of living issues, justices ruled that lawmakers’ changes interfere with workers’ proper contract rights. Declared the court, however: “In all other respects, we conclude that petitioners’ challenges to the 2003 PERS legislation are not well taken.”

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The earnings guarantee had assured about 110,000 workers who joined the pension system before 1996 that the portion of their accounts invested in stocks would get annual returns of at least 8% annually, even in a down equity market. Legislators changed the law to ensure that PERS members would get an average 8% earnings on their stock investments over their length of their careers.

The cost of living issue had blocked COLAs for about 22,000 workers who retired between April 1, 2000 and April 1, 2004.

According to media reports Tuesday, the pension system may have to restore money to retirees’ accounts because of the high court’s decision, but the fiscal impact was not immediately known.

Legislative changes upheld by the Supreme Court include one that shifted future employee contributions to their pensions – 6% of their salaries – to separate accounts outside of PERS. The goal was to decrease some workers’ ultimate pensions by reducing the amount the retirement system matches in their PERS accounts when they retire.

The court also said the Legislature had authority to direct PERS to use updated life expectancy tables in determining benefits when a worker retires. Outdated tables that had been used since the 1970s didn’t reflect today’s longer average life expectancies (See  OPERS Life Tables Bill Heads to State Senate ). That meant many employees’ pension accounts didn’t stretch long enough to last until their death and taxpayers had to make up the difference so PERS could pay the added amount.

The 2003 Legislature passed the reforms at the urging of Governor Ted Kulongoski to shave a projected deficit once estimated to be as high as $17 billion. The changes trimmed about $9 billion from the estimate, according to media reports.

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