GAO: Change 401(k) Eligibility and Vesting Policies

The Government Accountability Office (GAO) has suggested additions to Congress’ and the Treasury Department’s “to do” lists that it believes will boost retirement savings.

In “401(k) Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings,” a report which the GAO issued on Nov. 21, the office offers recommendations based on a nongeneralizable survey of 80 plan sponsors and professionals serving 401(k) plans ranging in size from fewer than 100 participants to more than 5,000 regarding the plans’ use of eligibility and vesting policies and the reasons for using them. The GAO reviewed industry data on plans’ use of eligibility and vesting policies and projected potential effects on retirement savings based on hypothetical scenarios. It also interviewed federal officials and 21 retirement professionals and academic researchers.

The GAO notes that workers have come to rely less on traditional pensions and more on 401(k)s for retirement security. It adds that while the rules were designed in part to help sponsors provide profit-sharing contributions, 401(k) plan sponsors now are more likely to provide matching contributions and today’s workers may be likely to change jobs frequently.

The GAO found that many plans have policies that affect workers’ ability to:

1. save in plans (eligibility policies);
2. receive employer contributions; and
3. keep employer contributions if they leave their job (vesting policies).

The report also found that:

• 33 of the 80 plans did not allow workers younger than age 21 to participate;

• 19 plans required participants to be employed on the last day of the year to receive any employer contribution for that year;

• 57 plans had vesting policies requiring employees to work for a certain period before employer contributions to their accounts are vested; and

• plan sponsors and plan professionals surveyed identified lowering costs and reducing employee turnover as the primary reasons their plans use such policies.

The report suggests that Congress consider amending ERISA by changing the minimum age for plan eligibility and plans’ use of a last-day policy. It also suggests that the Treasury Department reevaluate existing vesting policies to assess if current policies are appropriate for today’s mobile workforce. The GAO believes that such an evaluation would be beneficial, given the potential for since vesting policies can affect retirement savings.