Certain 401(k) Plan Design Features Hinder Retirement Outcomes

The GAO suggests regulators re-evaluate eligibility age requirements, vesting policies and whether to allow plan sponsors to require employment on the last day of the year to receive company match.

Plan sponsors impose eligibility, vesting and matching policies on their participants in order to lower costs and reduce turnover, but these policies limit people’s ability to save, according to the Government Accountability Office (GAO).

GAO examined the policies of 80 401(k) plans and found that 41% do not permit those younger than age 21 to participate in their retirement plan. Twenty-four percent required participants to be employed on the last day of the year to receive company matches for that year, and 71% had vesting policies that require people to be employed for specific periods of time before their company matches are vested.

While the Employee Retirement Income Security Act (ERISA) permits employers to set these rules, GAO notes, 401(k) plans have become the primary retirement savings vehicle for Americans, who change jobs frequently. GAO says these policies could potentially reduce people’s retirement savings by significant amounts.

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“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% employer matching contribution from age 18 to 20 would have $134,456 less savings by their retirement age of 67 ($36,422 in 2016 dollars),” GAO says. In addition, “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% 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).”

As far as vesting is concerned, GAO continues, “if a worker leaves two jobs after two years, at age 20 and 40, where the plan requires three years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars).”

GAO is suggesting that Congress look into the minimum age required to participate in 401(k) plans and plans’ use of a last-day policy. In addition, GAO is asking the Treasury Department to “reevaluate existing vesting policies to assess if current policies are appropriate for today’s mobile workforce.”