Vesting schedules may seem like a small detail in retirement plan design, but they can have a major impact on employee retention and the overall success of a benefits strategy. By shifting from immediate vesting to a more gradual schedule—such as a three-year cliff—employers can better align retirement contributions with their long-term goals. It’s a strategic move that not only protects the organization’s investment in talent but also motivates employees to stay, grow, and contribute meaningfully over time.
This very approach was highlighted at a recent Certified 401(k) Plan Fiduciary Program hosted by TPSU at Fordham Law School, where Fred Barstein, Founder and CEO of TPSU, spoke with Michael, CFO of a New York City-based nonprofit organization with 165 employees and a 403(b) retirement plan.
Michael shared a key change his organization made after he came on board: shifting from immediate vesting of employer contributions to a three-year cliff vesting schedule. “When I joined, employer contributions were fully vested from day one,” Michael explained. “But we realized that wasn’t aligned with our long-term goals. Employees who left within a year or two still walked away with all the employer money, even if they weren’t a good fit or didn’t plan to stay.”
Working with their legal team, the organization amended the plan so that new hires would become vested in employer contributions only after completing three years of service. This change did not impact current employees, avoiding potential morale issues while reinforcing a culture of commitment. “It was a smart move,” Michael added. “It’s helped retain talent and ensure that our investments in people are benefiting those who are truly invested in our mission.”
Read the Full Transcript Here:
Fred Barstein:
Greetings. This is Fred Barstein, CEO and Founder at TPSU. I am here at Fordham Law School. We’ve just completed a program, a TPSU program here with Michael.
Welcome, Michael.
Michael:
Thank you. Thank you.
Fred Barstein:
Okay, if we ask you a few questions?
Michael:
Absolutely. My pleasure.
Fred Barstein:
There you go. So tell us a little bit about yourself, the size of your organization and your role.
Michael:
Well, I’m a CFO for a New York City based non-profit organization. We have about 165 employees right now, and we offer a defined contribution plan 403(b).
Fred Barstein:
So one of the things you said that caught my attention was about how you changed your risk schedule. Can you tell us what it was and why you changed it and the effect?
Michael:
Absolutely. I’ve been on board about five years, and one of the things I looked at when was initially hired was our plan. And at the time, we had an immediate vesting provision for employer money. Obviously, an employee money is vested immediately ’cause it’s employee money, but with the employer money, that also was vested immediately. And as I evaluated that, I felt that that probably wasn’t in the best interest of the organization. And what I looked at was within the first couple of years, an employee may not work out and an employer may seek to make a change or conversely, an employee may not want to stay in the organization and seek to make a change on their case. In either case, I felt that to have those individuals be vested for employer money was probably not in the best interest.
So what we did was we worked with our risk attorney to amend our plan, and we changed the immediate vesting provision to a three-year cliff vesting. Now, that didn’t impact any of our existing employees, so it didn’t become a moral issue. And what we found was by doing that, we were able to benefit those employees that remained with us. And when it got closer to three years, it also was a way of maintaining our employees that may look to lead, but we felt that a three-year cliff vesting was really in the best interest of the employer.
Fred Barstein:
Great. Thank you for that. Final question. One or two things you learned and would you recommend TPSU to other plan sponsors?
Michael:
Absolutely. I’ve been coming to the TPSU Conferences for several years and it’s very hands-on and it gives me an opportunity to hear from the experts, as well as hear from my peers. And as much as I think I’m educated in the process, I know there’s a lot more that I could learn, both formally through the TPSU folks as well as my peers.
Fred Barstein:
Great. Well, thank you for your time today.
Michael:
My pleasure.
Fred Barstein:
And thank you for watching 401kTV. Please stay tuned.
Michael:
Thank you.
