Distributional Choices of State and Local Workers Leaving North Carolina
Local Workers Leaving North Carolina State Retirement Plans
Robert L. Clark
Melinda Sandler Morrill
North Carolina State University
North Carolina State University
Pension Distributions for Separated Public Employees in NC
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• Terminated
Terminated employees have choice of employees have choice of
receiving an immediate lump sum distribution or to leave pension account open
or to leave pension account open
• Those that leave account open can request lump sum distribution at any time
lump sum distribution at any time
• Those that are vested, can receive a retirement benefit once that have reached the i
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age of eligibility for a retirement benefit
Key Research Issues
Key Research Issues
• What
What plan characteristics influence the choice plan characteristics influence the choice
of terminated employees?
• What individual factors explain the variation in What individual factors explain the variation in
the choice of pension distributions?
• Can financial literacy and financial information C fi
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affect these choices?
Job Separation and Distribution of Pension Assets in the Public Sector
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Participants in DB pension plans accrue credits Participants
in DB pension plans accrue credits
toward a benefit in retirement
Public sector pensions often require employee contributions
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Vesting requirements typically 5 years or more Departing workers have a choice
Departing workers have a choice
Workers who are vested and are leaving public Workers
who are vested and are leaving public
employment have a choice of leaving their funds in the plan and receiving a benefit upon
funds in the plan and receiving a benefit upon reaching the age of eligibility or receiving a lump sum distribution
lump sum distribution.
Non‐vested terminations can leave money in the system but will not be eligible for a future
system but will not be eligible for a future benefit.
Important Plan Characteristics
Important Plan Characteristics
Non vested workers who request a lump sum q
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receive only their own contributions (without interest); if they leave money in system, they do not accrue any interest on their account
not accrue any interest on 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 eligible for a future retirement benefit and retiree
eligible for a future retirement benefit and retiree health insurance without having to pay a premium.
Key Questions
Key Questions
• Did the departing worker opt to accept a lump sum p
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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?
ultimately receive a retirement annuity?
• Did the departing workers who withdrew the funds y
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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 Are departing workers making different decisions after
the introduction of additional financial information resources being provided to plan participants?
North Carolina State Retirement Plans
North Carolina State Retirement Plans
The retirement system for public sector The
retirement system for public sector
employees in North Carolina consists of the Teachers’ and State Employees
Teachers
and State Employees’ Retirement Retirement
System (TSERS) and the Local Government Employees’ Retirement System (LGERS). Employees
Retirement System (LGERS)
These two plans are administered by separate board of trustees with the State Treasurer
board of trustees with the State Treasurer being the sole fiduciary of both plans.
North Carolina State Retirement Plans
North Carolina State Retirement Plans
The plans are very similar but not identical. The
plans are very similar but not identical
The benefit formula for TSERS is 1.82 percent times final average salary times years of
times final average salary times years of service. The benefit formula for LGERS is slightly higher at 1 84 percent times final
slightly higher at 1.84 percent times final average salary times years of service. Final average salary (FAS) is defined as the highest 4
average salary (FAS) is defined as the highest 4 years of earnings in both plans.
North Carolina State Retirement Plans
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
Terminations 2000 to 2009
Terminations 2000 to 2009
For this project, the retirement system For
this project the retirement system
produced a data file on all workers who became inactive between 2000 and 2009
became inactive between 2000 and 2009. The file includes information on the Th
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employee’s date of birth, gender, salary, and the retirement plan and public employer.
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Distribution Data
Distribution Data
The data indicated whether The
data indicated whether
a. the employee is currently receiving retirement benefits
retirement benefits, b. whether the retiree took a lump sum di ib i
distribution upon separation, or i
c. whether the separating worker has left the funds in the plan and the account is still “active.” Sample size
Sample size
The baseline sample includes 296,293 The
baseline sample includes 296 293
individuals who left the retirement systems during this period for whom we examined the
during this period for whom we examined the distribution decisions. Of these, 81,240 retired within a year of terminating employment. i i
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Sample size
Sample size
This leaves a sample of 215,053 employees who left p
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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
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
order to more closely approximate a sample that is not eligible to immediately retire, which reduces the sample to 175,170 separated workers.
Percent separating employees age 18 to 49 accepting lump sum: 2000
to 49 accepting lump sum: 2000‐
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‐2009
Full sample: 45%
Full
sample: 45%
Men: 49%
Women: 43%
Women: 43%
Years of Service:
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less than 1 44%
th 1 44%
1 to 4 50%
5 to 19 36%
Over 20 17%
Percent separating employees age 18 to 49 accepting lump sum: 2000
to 49 accepting lump sum: 2000‐
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‐2009
Not Vested
Not Vested
All
Men
Women
Vested
48%
52%
47%
Years of Service
less than 1 44%
less than 1
1 to 4
50%
LGERS
TSERS
53%
46%
All
Men
Women
35%
41%
32%
Years of Service
Years
of Service
5 to 19
36%
over 20
17%
LGERS
TSERS
43%
32%
Percent accepting lump sum: 2000 to 2009
Not Vested
Not Vested
Size of Account:
Less than $2 500
Less than $2,500 46%
46%
$2,500 to $9,999 51%
$10 000 t $24 999 44%
$10,000 to $24,999 44%
$25,000 to $74,999 48%
$
$75,000 to $99,999 $
over $100,000 Vested
38%
45%
36%
25%
14%
21%
Percent accepting lump sum: 2000 to 2009
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Not Vested
63%
69%
73%
75%
63%
47%
39%
30%
31%
28%
Vested
17%
21%
37%
50%
49%
41%
36%
30%
31%
27%
Regression coefficients takes lump sum: significant results
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Variable
Male
TSERS
Age
18 24
18‐24
25‐29
35‐39
40‐49
Not Vested
Not
Vested
0.043
‐0 060
‐0.060
Vested
0.091
‐0 085
‐0.085
‐0.014
0 014
‐0.030
0.026
0.031
0.032
0.011
Regression coefficients takes lump sum: significant results
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Variable
2001
2002
2003
2004
2005
2006
2007
2008
2009
Not Vested
0.069
0.098
0 108
0.108
‐0.168
0.168
‐0.246
‐0.330
‐0.323
‐0.352
Vested
0.040
0.188
0 311
0.311
0.296
0.229
0.174
0.124
0.145
0.111
Receiving the lump sum
Receiving the lump sum
Separating employees who request a lump sum Separating
employees who request a lump sum
distribution can either:
take the money in cash
take the money in cash
or
roll the money over into another tax qualified account
85% choose to take the cash
Receiving the lump sum
Receiving the lump sum
Findings:
1. Over time more workers are taking the cash
2 Men are slightly more likely to accept cash
2.
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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
Key Findings and Policy Issues
Key Findings and Policy Issues
1 Slightly
1.
Slightly less than half of separating workers less than half of separating workers
request a lump sum distribution
2 Men more likely than women to request 2.
Men more likely than women to request
lump sum as are local government employees and workers with fewer years of
employees and workers with fewer years of service
3 Those with larger account balances are more 3.
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likely to leave their funds in the pension
Key Findings and Policy Issues
Key Findings and Policy Issues
4. Of those requesting a lump sum distribution, 4
Of those requesting a lump sum distribution
85 percent wanted to receive the cash; over time the preference for cash increased
time the preference for cash increased.
5. After 2007, departing workers were significantly less likely to withdraw their funds
significantly less likely to withdraw their funds from the pension. Was this due to improved information and consultation?
information and consultation?
A puzzle
A puzzle
Why don
Why
don’tt all non
all non‐vested
vested terminating terminating
employees request an immediate lump sum?
Money left in system earns not interest, but if one believes that they will return to public b li
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sector, prior service will count toward vesting and future benefits.
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Another puzzle
Another puzzle
Why don
Why
don’tt all vested workers leave their money all vested workers leave their money
in the system?
Accepting lump sum distribution of only employee contributions plus interest results in l
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no future benefits and also the employee is not eligible for retiree health insurance.
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