80% of ‘Rollover’ Pension Funds Spent, Survey Shows : Retirement: Labor Department wants to change rules to encourage workers’ switching jobs to keep on saving their tax-free contributions.

This year, the Labor Department estimates, workers who change jobs will collect $12 billion in retirement savings that have been built up in tax-deferred pension arrangements such as 401(k) plans.

This money will be handed to the workers with the expectation that they will plunk it into an individual retirement account or a pension plan at their new employer and keep on saving for retirement. But in most cases they don’t. They spend it.

“Roughly 80% of these lump-sum distributions are being spent, rather than being saved through a new retirement plan,” Labor Secretary Elizabeth Dole said last week. Translated, this means that about $9.6 billion handed out this year will not find its way into retirement savings.

“The rollover provision (of federal law) is not working--it’s leaking,” said Assistant Labor Secretary David George Ball. “When people get a check, most people spend the money . . . to maintain their standard of living” and other forms of consumption, he said. And they do it even though they must pay all the accumulated taxes as well as a 10% penalty.

“Adequate retirement income is an important national objective and justifies the generous tax benefits that have been accorded private pension plans,” Dole told the annual meeting of the Assn. of Private Pension and Welfare Plans here. “Spending these savings before retirement frustrates that objective.”

Coupled with other trends in the economy, the Labor Department’s numbers raise alarming questions about the future welfare of retirees in this country.

The type of pension most susceptible to this problem, the so-called defined-contribution plan, is growing. Thus, the number of families that will depend on these accumulations for their retirement income is also growing. And how much they will have to live on will depend on how much they put into these plans and how wisely it was invested.

Withdrawals today cut directly into income tomorrow.

Calculations by Joseph S. Piacentini of the Employee Benefit Research Institute illustrate this. He figures that the average lump-sum distribution, if invested “less aggressively,” would roughly double on average if held in an IRA or other retirement account until age 65. Under a “more aggressive” investment strategy, the money would nearly triple. And these increases are in “real” terms, i.e., after inflation.

This means that the worker who fails to roll over a $6,800 lump-sum distribution--the average in 1988--forgoes the chance to have $13,900 or $19,800 at age 65, Piacentini shows.

Defined-contribution plans owe their popularity to their “portability,” and to the fact that they pose no risk to employers. These plans promise no set level of pension. Workers and/or employers contribute money to an account in the employee’s name. That account is invested, and earnings accumulate untaxed until retirement.

Employers love them because the employee bears the investment risk, and policy-makers like them because the account can go with the employee to a new job, unlike the more traditional pension plan.

The more traditional pension arrangement is called a defined-benefit plan. These, by contrast, though they promise a specific level of benefit, are not portable. Employees who leave a company before “vesting”--obtaining the right to a pension--get nothing. Those who do vest but leave later cease accumulating benefits and thus may get little at retirement.

“The days of working for one employer for 30 or 40 years are now the exception and not the rule,” Dole said. One in five Americans changes jobs each year, and one in 10 changes careers. “Some experts predict that the average worker will soon hold up to 10 jobs during his career,” she said.

So Dole has made pension portability a main goal of her tenure at Labor.

But the rollover figures make it clear that the kind of portability now offered poses too great a temptation for the worker. If employees are passing through the BMW dealership on the way from Job 1 to Job 2, portability will make the problem worse rather than better.

Piacentini, on whose research the Labor Department’s numbers were based, said that if saving is defined broadly, the picture isn’t quite as grim. Some of the money goes into non-retirement savings, and some goes to buy homes, pay off debt, start businesses and the like, so it’s not “that it is all being immediately squandered.”

But “the point is once you have failed to roll (your money) over, you have lost the tax advantages, and you have lost the incentive to save it until retirement,” he said.

The answer, Dole and her staff believe, is in part psychological. They propose to make the rollovers automatic, so that the worker never actually gets his or her hands on the money.

Under the Labor Department’s plan, employers would be required to roll over their contributions and the employee’s as well if the employee requests it. The employee would retain the same power to borrow or withdraw the money that he or she has now, but once the money is deposited in the new IRA or pension plan, “we believe the behavioral pattern will be to leave it,” Ball said.

Some critics of increased government regulation of pensions argue that each new set of requirements provides one more reason for employers to shy away from providing pensions at all.

Robert L. Clark of North Carolina State University, who describes himself as “a basic free-choice type of person,” wonders, “Why should one worry about an individual making choices about when to draw down their savings? They might be better off (withdrawing the money early). Who’s to say what is best for their long-term lifetime satisfaction or well-being?”

However, it “does mean that if the choices they make are not the best, they might be poor in retirement.”

Clark apparently is willing to let people live with the consequences of those choices, but Dole and others are not. The department expects to propose legislation to make the rollovers automatic.

Until then, any worker who gets a lump-sum distribution would do well to remember the old TV ad: Your pension fund can “pay you now or pay you later,” and you’re likely to be a lot better off if you let it pay you later.