Plan Eligibility, Vesting Focus of GAO Report

A new report from the Government Accountability Office (GAO) looks at plan eligibility and vesting policies – and offers some suggestions.

Noting that current law permits 401(k) plans to require a minimum age of 21 and at least 1,000 hours of service over one year for a worker to be eligible to join an employer’s 401(k) plan, GAO conducted a survey of about 80 plan sponsors and plan professionals. It found that plan sponsors may use these policies to reduce the costs and challenges incurred when short-term workers enroll in the plan and leave behind small accounts. That said, the GAO considered lowering the current legal thresholds, and projected that “these eligibility policies can potentially reduce workers’ retirement savings.”

Now, it doesn’t take an advanced math degree to figure that letting (or even making) workers save earlier would translate into higher savings at retirement. Still, the GAO report noted that an 18-year-old worker earning $15,822 per year who is ineligible to enroll in an employer’s plan until age 21 may forego savings at retirement of $85,85772 ($23,258 in 2016 dollars) if they had been able to save and invest 5.3% of their salary over that three-year period. That savings rate is the average contribution level for non-highly compensated employees reported by plans in PSCA’s 57th Annual Survey.

Vested ‘Interests’

GAO also considered the impact of vesting policies, and noted that, particularly in view of the reality that the median length of stay with a private sector employer is currently about four years, the rule permitting a six-year vesting policy “may be outdated.” Clearly, workers who leave employment prior to the end of the plan’s vesting period lose the opportunity to have those funds grow in the plan or to transfer those contributions into their new employer’s plan, reducing their retirement savings – and GAO said that a reexamination by Treasury of the appropriateness of current maximum vesting policies could help determine whether they unduly reduce the retirement savings of workers who change jobs.

How much difference could it make? GAO notes as an example that if a worker leaves two jobs after two years, at ages 20 and 40, where the plan requires three years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars). GAO notes that 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, and that the vesting caps for employer matching contributions in 401(k) plans are 15 years old.

GAO also noted that current law permits 401(k) plan sponsors to require participants to be employed on the last day of the plan year to be eligible to receive employer contributions to their account, and to delay the accrual of employer matching contributions until the end of the year. The GAO noted that although plan sponsors may have previously found these two policies to be beneficial, their projections suggest they may also potentially reduce workers’ retirement savings.

Finally, having clear and concise information about their retirement plan’s eligibility and vesting policies helps employees make informed decisions affecting their retirement savings. Guidance from DOL can help plan sponsors better inform participants about the plan policies that they must understand to make optimal decisions.

Recommended Actions

In sum, GAO recommended the following actions by Congress:

  • Extend plan eligibility to otherwise eligible workers at an age earlier than 21
  • Amend the definition of a year of service, given the prevalence of part-time workers in today’s workforce

GAO also said that Congress may wish to consider whether ERISA’s provisions related to last day policies and the timing of employer matching contributions need to be adjusted to reflect today’s mobile workforce and workplace plans, which are predominantly 401(k) plans offering matching employer contributions.

GAO also recommended that the Treasury should evaluate the appropriateness of existing maximum vesting policies for account-based plans, considering today’s mobile labor force, and seek legislative action to revise vesting schedules, if deemed necessary – and stated that the Department of Labor could provide assistance with such an evaluation.

Speaking of the Labor Department, GAO said the agency should develop guidance for plan sponsors that identifies best practices for communicating information about eligibility and vesting policies in a clear manner in summary plan descriptions to help participants better understand eligibility and vesting policies. For example, DOL could discourage plans from including in documents information about employer contributions or other provisions that are not actually being used by the plan sponsor.

Odds of any of this actually happening?

Add Your Comments

2 Comments

  1. David J. Kupstas
    Posted November 29, 2016 at 1:34 pm | Permalink

    No mention of worker responsibility here. The 18-year-old worker is permitted to take some initiative and save in a deductible IRA. As for the “mobile workforce,” the whole point of the vesting schedule is to incent people to stay. It costs time and money to replace workers from “today’s mobile workforce.” (By the way, it is my understanding that today’s workforce is no more mobile than in decades past.) Finally, for part-timers, the IRA is available. I suppose since IRAs require employee contributions and it is employer contributions they are concerned about, next up is for GAO to recommend that Congress force employers to pay part-timers more money.

  2. Nevin E. Adams, JD
    Posted November 30, 2016 at 8:52 am | Permalink

    David, your comments are dead-on, specifically that American workforce tenure has been pretty consistent going back to WWII (see http://www.napa-net.org/news/managing-a-practice/industry-trends-and-research/better-business/ – that said, it remains an article of faith for some that Millennials “invented” job hopping). That said, the GOA pretty much looks at what it is asked to look at. And to a hammer, everything looks like a nail.

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