Defined benefit pension plan distribution decisions by public sector employees

a r t i c l e i n f o Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore , the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina. Each year, millions of American workers leave their jobs prior to retirement either by choice or due to termination by their employers. Many of these job changers participate in defined benefit pension plans. On leaving their employers, these workers are often given a choice of keeping their retirement accounts open, thus maintaining a claim on a future life annuity, or accepting an immediate lump sum distribution (LS) of their pension assets. This decision is distinct from that faced upon retirement, since workers maintaining their account will not receive any cash benefits until reaching retirement age. Workers who accept the LS are then given a choice of whether they want to roll the funds over into an IRA or to accept the cash as taxable income and also pay a tax penalty for early withdrawal if under age 59.5. These choices can have significant long run implications for future retirement income and shed light on the magnitude of leakages from retirement saving. In a report describing sources of leakage of workers' retirement savings from 401(k) plans, the Government Accountability Office (2009) concluded that cashing out benefits at job separation represents the principle form of leakage of retirement …