In an era of a mobile workforce where we know the importance of saving early, does it still make sense for sponsors of defined contribution (DC) plans to maintain strict vesting and eligibility requirements while only allowing employees to join a plan at age 21? A Government Accounting Office study (GAO) highlights the effect of these policies which can hurt retirement savings by over $600,000 over the course of a worker’s career.
Let’s look deeper:
- Age Requirements – ERISA requires workers 21 or older be eligible to join a DC plan but keeping a worker out of the plan from 18-20 years old could cost an employee more than $134,000.
- One Year Vesting – Requiring a worker to be employed the last day of the year could cost over $411,000.
- Vesting of the Match – $82,000 for a 3-year vesting and $29,000 for one year.
How common are these practices? Of the 80 plans reviewed by the GAO with fewer than 100 participants up to 5,000, the results were stunning:
- 41% of plan required workers to be 21 or older
- 24% had a one year eligibility requirement
- 71% had some vesting of the match with the most common five years according to Vanguard
With retirement coverage a major issue causing over 30 states to consider or pass laws requiring companies to offer a retirement plan at work, prohibiting younger workers and even some temp employees is an issue. We all know the importance of saving as early as possible.
And with a mobile workforce, one year eligibility may no longer make sense – high turnover businesses may require 90 days to relieve administrative burdens. Nor does long vesting of matches make sense as more companies have saved money eliminating DB plans moving some of that savings to matches.
As a result, the GAO recommends the following policy changes:
- Changes to minimum age from 21 years old
- Revisions of last day eligibility requirements
- Review of vesting schedules
Not mentioned but worth consideration is making it easier for mobile workers to consolidate accounts, transfer deferral rates and even defer a percentage of their raise. We’re in a 401k world – let’s act like it.
