Monday, March 3, 2008

Medill on Participant Perceptions and Decision-Making Concerning Retirement Benefits

Medill_2 Colleen Medill (Nebraska), sometime guest blogger on these pages, has posted Participant Perceptions and Decision-Making Concerning Retirement Benefits on the Center for Retirement Research at Boston College webpage.

Here's the abstract:

From 1964 until 2002, the State of Nebraska sponsored a defined contribution plan for its employees.  During this period, the plan was unique among state pension plans because it was an individual account-type plan that offered participants the choice of a lump sum or annuity distribution upon retirement.  Such a choice presents the opportunity to learn more about how individuals perceive financial risks and weigh various factors when deciding how to access their retirement benefits.  This study reports the results of a new survey of Nebraska state workers who retired or terminated employment in 1997. The results offer a perspective on how individuals perceive their decisions 10 years later.  The findings reveal three general themes. First, retirees tended to underestimate the financial risks associated with uninsured health care expenses.  Sixty-five percent of retiree respondents said that they had initially underestimated such risk. Second, federal policies may influence the distribution decision.  For example, many respondents cited tax penalties on lump sum distributions as a major factor in their decision, which is consistent with a high percentage choosing a nontaxable direct rollover distribution. Finally, the results provide a basis for cautious optimism that retirees will be able to successfully manage a present value sum distribution during retirement.  Over 90 percent of retiree respondents reported that they were able to cover their living expenses 10 years after their retirement.

A timely article as more retirement plan participants are shifted to defined contribution plans.  And I am happy  to see there is new reason for cautious optimism in this area, as previous signs suggested that defined contribution plans are leading this country into another retirement savings debacle.

The executive summary of Colleen's paper can be found here and the full paper is here.


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