The United States Government Accountability Office has identified a handful of eligibility- and vesting-related plan design decisions that have a significant long-term effect on employees’ retirement plan account balances. In its recent “401(k) Plans Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings” report, the GAO recognized that employers hold back employees’ savings by:
- imposing a minimum age (typically 21) for participation
- requiring lengthy service periods before permitting employees to save
- imposing a last-day-of-the-plan-year eligibility requirement
- applying lengthy vesting schedules – particularly one extending out to six years
The GAO’s report provides interesting commentary on the degree to which the United States workforce has become increasingly mobile, which exacerbates the impact of the design decisions listed above. When employees leave jobs more frequently, the vesting provisions hit them harder. The concern is compounded, then, when employees move among multiple employers that apply minimum age and service rules, which serve to keep employees out of the savings game. As a result, the GAO recommends that Congress, Treasury, and the DOL consider an update to ERISA’s plan eligibility and vesting rules.
That would take some time – and obviously the ability for those in Washington to reach an agreement. In the meantime, we wanted to encourage plan sponsors to think about their plan design choices and to assess whether (within budgetary restraints) they might make small changes that could have a large impact on employees’ long-term prospects.