A survey of company 401k vesting policies and schedules by the Government Accountability Office (GAO) finds outdated rules that could negatively impact participant retirement savings.
The GAO contacted 80 401(k) plans ranging in size from fewer than 100 participants to more than 5,000. Thirty-three of 80 plans surveyed had policies that did not allow workers younger than age 21 to participate in the plan. In addition, 19 plans required participants to be employed on the last day of the year to receive any employer contribution for that year. Fifty-seven plans had vesting policies requiring employees to work for a certain period of time before employer contributions to their accounts are vested.
401k plan sponsors and plan professionals identified lowering costs and reducing employee turnover as the primary reasons that plans use these policies.
While allowed under ERISA, the GAO urged the Treasury Department, which it said is responsible for oversight, to update vesting schedule requirements due to the demise of defined benefit pension plans.
“[O]ver time workers have come to rely less on traditional pensions and more on their 401(k) plan savings for retirement security,” it argues. “Further, while the rules were designed, in part, to help sponsors provide profit sharing contributions, today 401(k) plan sponsors are more likely to provide matching contributions and today’s workers may be likely to change jobs frequently.”
As an example, assuming a minimum age policy of 21, GAO projections estimate that a medium-level earner who does not save in a plan or receive a 3 percent employer matching contribution from age 18 to 20 could have $134,456 less savings by their retirement at age 67 ($36,422 in 2016 dollars).
In addition, the law permits plans to require that participants be employed on the last day of the year to receive employer contributions each year, which could reduce savings for today’s mobile workforce. GAO’s projections suggest that if a medium-level earner did not meet a last day policy when leaving a job at age 30, the employer’s 3 percent matching contribution not received for that year could have been worth $29,297 by the worker’s retirement at age 67 ($8,150 in 2016 dollars).
GAO’s projections also suggest that 401k vesting policies may also potentially reduce retirement savings. For example, if a worker leaves two jobs after 2 years, at ages 20 and 40, where the plan requires 3 years for full 401k vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars).
“The Department of Treasury is responsible for evaluating and developing proposals for legislative changes for 401(k) plan policies, but has not recently done so for vesting policies,” it concludes. “Vesting caps for employer matching contributions in 401k plans are 15 years old. A re-evaluation of these caps would help to assess whether they unduly reduce the retirement savings of today’s mobile workers.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
