401(K) Plans: Effects of Eligibility and Vesting Policies on Workers' Retirement Savings
What GAO Found
GAO's nongeneralizable survey of 80 401(k) plans ranging in size from fewer than 100 participants to more than 5,000 and its review of industry data found that many plans have policies that affect workers' ability to (1) save in plans (eligibility policies), (2) receive employer contributions, and (3) keep those employer contributions if they leave their job (vesting policies). 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. Plan sponsors and plan professionals GAO surveyed identified lowering costs and reducing employee turnover as the primary reasons that plans use these policies.
The Employee Retirement Income Security Act of 1974 (ERISA) allows plan sponsors to set eligibility and vesting policies. Specifically, federal law permits 401(k) plan sponsors to require that workers be at least age 21 to be eligible to join the plan. The law also permits plans to use rules affecting 401(k) plan participants' receipt of employer contributions and the vesting of contributions already received. However, over time workers have come to rely less on traditional pensions and more on their 401(k) plan savings for retirement security. 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. GAO's projections for hypothetical scenarios suggest that these policies could potentially reduce workers' retirement savings. For 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). Saving early for retirement is consistent with Department of Labor guidance as well as previous legislation and allows workers to benefit from compound interest, which can grow their savings over decades. 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. For example, 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 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 vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars).The Department of Treasury (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. Vesting caps for employer matching contributions in 401(k) 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.
Why GAO Did This Study
ERISA allows sponsors to opt to set up 401(k) plans—which are the predominant type of plan offered by many employers to promote workers' retirement savings—and to set eligibility and vesting policies for the plans. GAO was asked to examine 401(k) plans' use of these policies. Among other objectives, this report examines 1) what is known about the prevalence of these policies and why plans use them, and 2) the potential effects of these policies on workers' retirement savings.
GAO conducted a nongeneralizable survey of 80 plan sponsors and plan professionals regarding plans' use of eligibility and vesting policies and the reasons for using them; reviewed industry data on plans' use of eligibility and vesting policies; and projected potential effects on retirement savings based on hypothetical scenarios. GAO also interviewed federal officials and 21 retirement professionals and academic researchers.
GAO suggests Congress consider a number of changes to ERISA, including changes to the minimum age for plan eligibility and plans' use of a last-day policy. GAO is also making two recommendations, including that Treasury reevaluate existing vesting policies to assess if current policies are appropriate for today's mobile workforce. Treasury had no comment on the recommendation. GAO believes that such an evaluation would be beneficial, given the potential for vesting policies to reduce retirement savings.
Matter for Congressional Consideration
|To help increase plan participation and individuals' retirement savings, Congress should consider updating ERISA's 401(k) plan eligibility provisions to extend plan eligibility to otherwise eligible workers at an age earlier than 21.||In December 2017, the representative - who requested this report - proposed legislation (H.R.4524) called "The Retirement Plan Simplification and Enhancement Act of 2017" that would eliminate a disincentive for 401(k) plans to open plan eligibility to workers younger than age 21. Specifically, the bill would permit a plan to exclude workers under age 21 from consideration and calculation of the "top heavy" rules. The change could increase plan participation and individuals' retirement savings.|
|To help increase plan participation and individuals' retirement savings, Congress should consider updating ERISA's 401(k) plan eligibility provisions to amend the definition of "year of service," given the prevalence of part-time workers in today's workforce.||In December 2017, the representative - who requested this report - proposed legislation (H.R.4524)called "The Retirement Plan Simplification and Enhancement Act of 2017" that would ensure that any minimum service requirements for 401(k) plan eligibility allow for long-term part-time workers to eventually become eligible to join their employer's plan. Specifically, after working 500 or more hours for 3 consecutive years a worker's service must meet a plan's service requirement for eligibility.|
|Congress should consider whether ERISA's provisions related to 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.||As of November 2022, Congress has not taken action on this matter. The law continues to permit plans to delay employer matching contributions until the end of the year rather than paying them in tandem with employee contributions made throughout the year. More timely contributions would allow participants to potentially profit from the investment of that money and the reinvestment of those profits. In GAO-17-69, we reported that policies for delayed contributions were established when profit sharing plans were the norm, before 401(k) plans and matching contributions became commonplace. We continue to believe that reconsidering the statute permitting this policy could be an opportunity to help ensure that plans' policies reflect the characteristics of today's workforce and workplace plans.|
|Congress should consider whether ERISA's provisions related to last day policies need to be adjusted to reflect today's mobile workforce and workplace plans, which are predominantly 401(k) plans offering matching employer contributions.||As of November 2022, Congress had not taken action on this matter. We continue to believe that Congress may want to consider if ERISA's provisions should continue to permit plans to require even vested participants to work through the last day of the year to keep employer contributions matching the participants' own contributions made through the year. As we reported in GAO-17-69, the opportunity for compound growth means that even an apparently modest loss of $1,433 in employer contributions for the year could have grown to $7,936 over time-equal to 3 percent of the entire retirement savings balance for a hypothetical worker described in our report.|
Recommendations for Executive Action
|Department of the Treasury||
Priority Rec.To ensure that current vesting policies appropriately balance plans' needs and interests with the needs of workers to have employment mobility while also saving for retirement, 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. The Department of Labor could provide assistance with such an evaluation.
As of February 2023, no action had been taken on this recommendation. The last update from Treasury, in August 2020, was the reiteration of its policy of not recommending legislative change to Congress. The agency noted that any updates to the regulations under Code section 411, which concern vesting schedules, cannot modify permitted vesting schedules as determined by Congress. That is why our recommendation was for the agency to seek legislative action if it determined, upon evaluation of the policies, that a change to vesting rule was warranted. Given that more than 72 million people hold active 401(k) plan accounts and that median tenure with current employer in the private-sector is 4.1 years, the potential for these policies to significantly impact Americans' retirement security remains. We will close this recommendation when Treasury evaluates the appropriateness of current maximum vesting policies to help determine whether they unduly reduce the retirement savings of workers, regardless of whether the agency opts to seek legislative action.
|Department of Labor||To help participants better understand eligibility and vesting policies, the Department of Labor (DOL) 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. 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.||
As of June 2021, the Department of Labor (DOL) had not reported steps taken toward implementing this recommendation. The agency has yet to decide how it will respond to responses received from a Request for Information posted in October 2019, which sought public input on whether and how any additional changes to ERISA's general disclosure framework, focusing on design, delivery, and content, may be made to further improve the effectiveness of ERISA disclosures. Such actions may include revising standards for the summary plan description, which our report found can contain obsolete and confusing information concerning eligibility and vesting. The agency also notes that it has allocated EBSA's regulatory resources to other priority projects, including implementing recently enacted ERISA provisions in the SECURE Act. We continue to encourage the agency to include the clearer communication of eligibility and vesting policies in its future regulatory work and, in the meantime, to consider using sub-regulatory guidance to help plan sponsors better communicate these critical policies. We await further progress by the agency.