Inform Participants of the Risks of Lump Sum Distributions
A study recently conducted on behalf of MetLife found that participants are quickly depleting their lump sum distributions. The study found that one out of five workers who accepted a lump sum from their employer-sponsored retirement plan have depleted those monies. Breaking it down, 21% of participants had depleted their lump sum entirely, 62% had some money left, and 17% did not know or couldn’t recall if they had any of the sum remaining. Most people dipped into their lump sums to purchase a car, second home, or pay down debt. Whether a participant drew from a defined benefit or defined contribution retirement savings plan had no impact on whether a participant depleted the money more quickly. It is important for plans to clearly explain to participants that lump sums can disappear relatively rapidly. For example, plans may consider providing information regarding lump sum versus annuity distributions and the risk of outliving money or information about the risk of spending a large sum of money more quickly than expected.