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Determinants of Distribution Decisions by Nonvested Employees: Does Employer's Pension Funding Matter?

Julia Y. Davidyan (Nova Southeastern University, USA)

Advances in Accounting Behavioral Research

ISBN: 978-1-80382-802-2, eISBN: 978-1-80382-801-5

Publication date: 25 August 2022

Abstract

Given the ongoing attention surrounding public sector defined benefit pensions, the participating plan sponsors such as local units of government may be tempted to reduce their future pension liabilities, possibly at the expense of their former employees. Alternatively, public sector employees may act to withdraw their pension contributions if they have concerns related to the sustainability of their employer's pension plan. Nonvested, terminated employees have the option of leaving their contributions on account or taking them as a distribution in the form of a rollover to a qualifying retirement account, or a cash-out. Because a cash distribution carries with it the potential for retirement savings ‘leakage,’ it continues to be of public concern.

This study contributes to the literature by examining determinants of the distribution decisions of terminated employees and is first to specifically explore the association of pension funding levels as a determinant of such decision. Decisions of 46,608 employees who separated employment between 2010 and 2013 were examined. The results suggest that a decrease in the employer's pension funding is associated with increased probability that the terminated employee will take a refund of their contributions. Additionally, the data reveal that 88% of the terminating employees who took a refund requested to receive it in the form of a cash-out, totaling about $38 million of cash distributions. Lastly, about 1,000 of those employees each cashed out more than $8,000, thus suggesting the pension leakage problem warrants further research and perhaps policy changes.

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Acknowledgements

Acknowledgments

I gratefully acknowledge the helpful comments and suggestions received from Dr. Khondkar Karim, editor, and an anonymous reviewer. I also express gratitude and special thanks to Dr Tammy Waymire, for her valuable insight. I further wish to thank the participants, reviewers, and discussants at the following conferences: the 2017 American Accounting Association, Public Interest Section Mid-Year Meeting, the 2016 American Accounting Association, Government and Nonprofit Section Mid-Year Meeting, and the 2015 Annual Association for Budgeting and Financial Management Conference. Finally, I also thank the IMRF staff for their assistance with obtaining the data utilized in the study.

Citation

Davidyan, J.Y. (2022), "Determinants of Distribution Decisions by Nonvested Employees: Does Employer's Pension Funding Matter?", Karim, K.E. (Ed.) Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 25), Emerald Publishing Limited, Leeds, pp. 149-181. https://doi.org/10.1108/S1475-148820220000025007

Publisher

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Emerald Publishing Limited