Distributional Choices of State and Distributional Choices of State and Local Workers Leaving North CarolinaLocal Workers Leaving North CarolinaLocal Workers Leaving North Carolina Local Workers Leaving North Carolina State Retirement PlansState Retirement Plans

Robert L. ClarkRobert L. ClarkMelinda Sandler MorrillMelinda Sandler Morrill

North Carolina State UniversityNorth Carolina State UniversityNorth Carolina State UniversityNorth Carolina State University

Pension Distributions for Separated Pension Distributions for Separated bl lbl lPublic Employees in NCPublic Employees in NC

• Terminated employees have choice ofTerminated employees have choice of receiving an immediate lump sum distribution or to leave pension account openor to leave pension account open

• Those that leave account open can request lump sum distribution at any timelump sum distribution at any time

• Those that are vested, can receive a i b fi h h h d hretirement benefit once that have reached the 

age of eligibility for a retirement benefit

Key Research IssuesKey Research IssuesKey Research IssuesKey Research Issues

• What plan characteristics influence the choiceWhat 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?C fi i l li d fi i l i f i• Can financial literacy and financial information affect these choices?

Job Separation and Distribution of Job Separation and Distribution of h blh blPension Assets in the Public SectorPension Assets in the Public Sector

Participants in DB pension plans accrue creditsParticipants in DB pension plans accrue credits toward a benefit in retirement

Public sector pensions often require employee ib icontributions

Vesting requirements typically 5 years or more 

Departing workers have a choiceDeparting workers have a choiceDeparting workers have a choiceDeparting workers have a choice

Workers who are vested and are leaving publicWorkers who are vested and are leaving public employment have a choice of leaving their funds in the plan and receiving a benefit uponfunds in the plan and receiving a benefit upon reaching the age of eligibility or receiving a lump sum distributionlump sum distribution.

Non‐vested terminations can leave money in the system but will not be eligible for a futuresystem but will not be eligible for a future benefit.

Important Plan CharacteristicsImportant Plan CharacteristicsImportant Plan CharacteristicsImportant Plan Characteristics

Non vested workers who request a lump sum q preceive only their own contributions (without interest); if they leave money in system, they do not accrue any interest on their accountnot 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 retireeeligible for a future retirement benefit and retiree health insurance without having to pay a premium.

Key QuestionsKey QuestionsKey QuestionsKey Questions

• Did the departing worker opt to accept a lump sum p g p p pdistribution 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 chose to directly accept the distribution or did they y p yhave 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 PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement Plans

The retirement system for public sectorThe retirement system for public sector employees in North Carolina consists of the Teachers’ and State Employees’ RetirementTeachers  and State Employees  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 Treasurerboard of trustees with the State Treasurer being the sole fiduciary of both plans.

North Carolina State Retirement PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement Plans

The plans are very similar but not identicalThe plans are very similar but not identical.  The benefit formula for TSERS is 1.82 percent times final average salary times years oftimes final average salary times years of service.  The benefit formula for LGERS is slightly higher at 1 84 percent times finalslightly higher at 1.84 percent times final average salary times years of service.  Final average salary (FAS) is defined as the highest 4average salary (FAS) is defined as the highest 4 years of earnings in both plans.

North Carolina State Retirement PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement PlansNorth Carolina State Retirement Plans

Each plan requires 5 year vesting and a 6.0Each 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 serviceb. age 60 with 25 years of servicec. 30 years of service with no age requirement

Terminations 2000 to 2009Terminations 2000 to 2009Terminations 2000 to 2009Terminations 2000 to 2009

For this project the retirement systemFor this project, the retirement system produced a data file on all workers who became inactive between 2000 and 2009became inactive between 2000 and 2009.  

Th fil i l d i f i hThe file includes information on the employee’s date of birth, gender, salary, and h i l d bli lthe retirement plan and public employer.

Distribution DataDistribution DataDistribution DataDistribution Data

The data indicated whetherThe data indicated whether a. the employee is currently receiving retirement benefitsretirement benefits, 

b. whether the retiree took a lump sum di ib i idistribution upon separation, or 

c. whether the separating worker has left the funds in the plan and the account is still “active.” 

Sample sizeSample sizeSample sizeSample size

The baseline sample includes 296 293The baseline sample includes 296,293 individuals who left the retirement systems during this period for whom we examined theduring this period for whom we examined the distribution decisions.  

Of these, 81,240 retired within a year of i i lterminating employment. 

Sample sizeSample sizeSample sizeSample size

This leaves a sample of 215,053 employees who left p , p ythe system, were not eligible start retirement benefits, and thus had to decide whether to accept a lump sum distribution or leave their funds in thelump 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 notorder 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 Percent separating employees age 18 llto 49 accepting lump sum: 2000to 49 accepting lump sum: 2000‐‐20092009

Full sample: 45%Full sample:    45%Men:            49%Women: 43%Women:      43%

Years of Service:l th 1 44%less than 1   44%1 to 4            50%5 to 19          36%Over 20  17%

Percent separating employees age 18 Percent separating employees age 18 llto 49 accepting lump sum: 2000to 49 accepting lump sum: 2000‐‐20092009

Not Vested VestedNot VestedAll 48%Men 52%Women 47%

VestedAll 35%Men 41%

Women 47%

Years of Serviceless than 1 44%

Women 32%

Years of Serviceless than 1 44%1 to 4 50%

Years of Service5 to 19 36%over 20 17%

LGERS 53%TSERS 46%

LGERS 43%TSERS 32%

Percent accepting lump sum: 2000 to Percent accepting lump sum: 2000 to 20092009

Not Vested VestedNot Vested VestedSize of Account:Less than $2 500 46% 38%Less than $2,500        46% 38%$2,500 to $9,999        51% 45%$10 000 t $24 999 44% 36%$10,000 to $24,999    44% 36%$25,000 to $74,999    48% 25%$ $$75,000 to $99,999       14%over $100,000              21%

Percent accepting lump sum: 2000 to Percent accepting lump sum: 2000 to 20092009

Not Vested Vested2000 63% 17%2001 69% 21%2002 73% 37%2002 73% 37%2003 75% 50%2004 63% 49%2005 47% 41%2006 39% 36%2007 30% 30%2007 30% 30%2008 31% 31%2009 28% 27%

Regression coefficients takes lump Regression coefficients takes lump f lf lsum: significant resultssum: significant results

Variable Not Vested VestedVariable Not Vested VestedMale 0.043 0.091TSERS ‐0 060 ‐0 085TSERS ‐0.060 ‐0.085Age18 24 0 01418‐24 ‐0.01425‐29 ‐0.03035‐39 0.026 0.03240‐49 0.031 0.011

Regression coefficients takes lump Regression coefficients takes lump f lf lsum: significant resultssum: significant results

Variable Not Vested Vested2001 0.069 0.0402002 0.098 0.1882003 0 108 0 3112003 0.108 0.3112004 0.2962005 ‐0.168 0.2292005 0.168 0.2292006 ‐0.246 0.1742007 ‐0.330 0.1242008 ‐0.323 0.1452009 ‐0.352 0.111

Receiving the lump sumReceiving the lump sumReceiving the lump sumReceiving the lump sum

Separating employees who request a lump sumSeparating employees who request a lump sum distribution can either:

take the money in cashtake the money in cashorroll the money over into another tax qualified account

85% choose to take the cash

Receiving the lump sumReceiving the lump sumReceiving the lump sumReceiving the lump sum

Findings:Findings:1. Over time more workers are taking the cash2 li h l lik l h2. Men are slightly more likely to accept cash3. Nonvested TSERS participants are less likely 

to take the cash4. Those with larger account balances are more g

likely to roll the money over

Key Findings and Policy IssuesKey Findings and Policy IssuesKey Findings and Policy IssuesKey Findings and Policy Issues

1 Slightly less than half of separating workers1. Slightly less than half of separating workers request a lump sum distribution

2 Men more likely than women to request2. Men more likely than women to request lump sum as are local government employees and workers with fewer years ofemployees and workers with fewer years of service

3 Th i h l b l3. Those with larger account balances are more likely to leave their funds in the pension

Key Findings and Policy IssuesKey Findings and Policy IssuesKey Findings and Policy IssuesKey Findings and Policy Issues

4 Of those requesting a lump sum distribution4. Of those requesting a lump sum distribution, 85 percent wanted to receive the cash; over time the preference for cash increasedtime the preference for cash increased.

5. After 2007, departing workers were significantly less likely to withdraw their fundssignificantly less likely to withdraw their funds from the pension.  Was this due to improved information and consultation?information and consultation?

A puzzleA puzzleA puzzleA puzzle

Why don’t all non‐vested terminatingWhy don t all non vested terminating employees request an immediate lump sum?

Money left in system earns not interest, but if b li h h ill blione believes that they will return to public 

sector, prior service will count toward vesting d f b fiand future benefits.

Another puzzleAnother puzzleAnother puzzleAnother puzzle

Why don’t all vested workers leave their moneyWhy don t all vested workers leave their money in the system?

Accepting lump sum distribution of only l ib i l i l iemployee contributions plus interest results in 

no future benefits and also the employee is li ibl f i h l h inot eligible for retiree health insurance.