INVESTMENT COMPANY INSTITUTE RESEARCH SERIES FALL 2008 Defined Contribution Plan Distribution Choices at Retirement a survey of employees retiring between 2002 and 2007 FALL 2008 : DEFINED CONTRIBUTION PLAN DISTRIBUTION CHOICES AT RETIREMENT 1 INVESTMENT COMPANY INSTITUTE RESEARCH SERIES FALL 2008 Defined Contribution Plan Distribution Choices at Retirement a survey of employees retiring between 2002 and 2007 John Sabelhaus, ICI Senior Economist, Michael Bogdan, ICI Associate Economist, and Sarah Holden, ICI Senior Director, Retirement and Investor Research, prepared this report. The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $12.11 trillion and serve almost 90 million shareholders. Copyright © 2008 by the Investment Company Institute Table of Contents Key Findings ................................................................................................................................................................................. 1 Introduction .................................................................................................................................................................................. 3 Summary of Findings ................................................................................................................................................................... 7 Disposition of Defi ned Contribution Balances at Retirement ............................................................................................... 7 Distribution Choices Made at Retirement ........................................................................................................................... 10 Use of Proceeds from Lump-Sum Distributions ................................................................................................................ 12 Characteristics of Retirees by Defi ned Contribution Distribution Outcomes .................................................................... 14 Chapter 1: Distribution Options and Retiree Characteristics ................................................................................................. 17 Types of Plans and Their Distribution Options .................................................................................................................. 17 Retirees with a Single Distribution Option .......................................................................................................................... 18 Retirees with Multiple Distribution Options ....................................................................................................................... 19 Differences in Retiree Household Characteristics by Number of Distribution Options ..................................................... 20 Defi ned Benefi t Plan Coverage among Retirees .................................................................................................................. 22 Health Insurance Coverage among Retirees ....................................................................................................................... 22 Chapter 2: Distribution Choices of Retirees with Multiple Options ...................................................................................... 25 Sources of Advice ............................................................................................................................................................... 26 Options Offered and Selected ............................................................................................................................................. 28 Frequency of Distribution Choices ...................................................................................................................................... 30 Stated Reasons for Distribution Choices ............................................................................................................................. 30 Chapter 3: Disposition of Defi ned Contribution Plan Lump-Sum Distributions at Retirement ........................................... 33 Frequency and Magnitude of Partial and Full Lump-Sum Distributions .......................................................................... 33 Reinvestment and Use of Lump-Sum Distributions .......................................................................................................... 34 Sources of Advice for Reinvestment of Lump-Sum Distributions ...................................................................................... 37 Expenditures Made with Lump-Sum Distributions ............................................................................................................ 37 Characteristics of Lump-Sum Distribution Recipients by Use of Proceeds ....................................................................... 38 Portfolio Holdings of Lump-Sum Distribution Recipients .................................................................................................. 42 Reinvestment of Lump-Sum Distributions in IRAs ............................................................................................................ 42 Chapter 4: Characteristics of Retirees Annuitizing or Deferring Account Balances ............................................................ 45 Annuitants ............................................................................................................................................................................ 45 Retirees Deferring Distributions .......................................................................................................................................... 50 Appendix A: Survey Methodology and Characteristics of Survey Respondents .................................................................. 55 Research Design ................................................................................................................................................................... 55 Questionnaire Design .......................................................................................................................................................... 56 FALL 2008 : DEFINED CONTRIBUTION PLAN DISTRIBUTION CHOICES AT RETIREMENT i Sampling Tolerances ............................................................................................................................................................ 56 Summary Characteristics of Respondents .......................................................................................................................... 58 Characteristics of Respondents by Type of Distribution Received ..................................................................................... 60 Issues of Concern in Retirement ......................................................................................................................................... 64 Views about Financial Situation in Retirement ................................................................................................................... 72 Appendix B: Description of Distribution Options and Plans Covered in the Survey ............................................................. 79 Distribution Options Covered in the Survey ....................................................................................................................... 79 Types of Plans Covered in the Survey ................................................................................................................................. 80 Appendix C: Exhibits Used in the Research ............................................................................................................................. 81 ii DEFINED CONTRIBUTION PLAN DISTRIBUTION CHOICES AT RETIREMENT : FALL 2008 List of Figures Introduction Figure I.1 U.S. Retiree Households’ Retirement Plan Coverage ...................................................................................... 4 Summary of Findings Figure S.1 What Happened to Defi ned Contribution Accounts at Retirement? ...............................................................7 Figure S.2 Disposition of Accumulated Defi ned Contribution Account Balances at Retirement..................................... 8 Figure S.3 Relationship Between Size and Disposition of Accumulated Defi ned Contribution Account Balances .............................................................................................................................................. 9 Figure S.4 Number and Type of Distribution Options Available to Retirees by Year of Survey .................................... 10 Figure S.5 Distribution Options Selected by Retirees with Choice by Year of Survey ................................................... 11 Figure S.6 Use of Proceeds from Lump-Sum Distributions ............................................................................................ 12 Figure S.7 Relationship Between Size and Reinvestment Rate of Lump-Sum Distributions ......................................... 13 Figure S.8 Use of Lump-Sum Distributions at Retirement ............................................................................................. 13 Figure