Doing What’s Best for Participants Is a Balancing Act

A GAO report about how certain DC plan design features can hinder retirement outcomes highlights how, even when making non-fiduciary decisions, there are questions about what is best for participants.

Recently, the Government Accountability Office (GAO) issued a report suggesting certain defined contribution (DC) plan eligibility, vesting and matching policies could limit employees’ ability to save for retirement.

Assuming a minimum age policy of 21 to be eligible to enter the plan, 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).

As far as vesting is concerned, GAO found that 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).

The GAO acknowledged in its report that many plan sponsors adopt eligibility, matching and vesting requirements to reduce costs incurred from employee turnover, and to discourage turnover.

David Levine, principal with Group Law Group, Chartered in Washington, D.C., says if employers were required to offer immediate eligibility to employees and there was a lot of turnover, it can incur costs that would be carried by everyone else. “Should longer-term employees subsidize other employees?” he queries. “If short-term employees drive up administrative costs, it hurts other employees.”

David Powell, principal with Groom Law Group, Chartered in Washington, D.C., adds that changing the rules may be good for some employees, but it will make plans a little more expensive, particularly for those employers with high turnover. To offset the higher costs, DC plan sponsors may lower the employer match contribution for everyone, or shift other benefit costs to employees, he says. 

Charles Jeszeck, director education, workforce and income security team (EWIS) at the U.S. Government Accountability Office (GAO) in Washington, D.C., points out to PLANSPONSOR that the GAO did recommend that Congress consider a number of changes to the Employee Retirement Income Security Act (ERISA), including changes to the minimum age for plan eligibility and plans’ use of an employment-on-the-last-day policy for receiving employer match. However, it only recommended that the Treasury Department consider whether existing vesting policies are appropriate for today’s mobile workforce.

“We didn’t recommend changes in vesting rules, just that Treasury take a look at them. It’s not immediately obvious what alternatives there should be,” Jeszeck says.

NEXT: What’s best for participants?

The GAO is very sensitive to issues of flexibility for employers and increasing costs, according to Jeszeck. But, he says there are not a lot of workers in the 18 to 20 age group—many are in college or the military, and some employers do not hire employees in this age group. “So there is not a huge number of employees involved. It could cost an employer money, for example, with the company match, but there aren’t a lot of them, so the impact will not be that great,” Jaszeck contends.

He also points out that lawmakers, research groups and others in the retirement industry are very concerned about employees having retirement plan coverage and participating in retirement plans—one reason states are acting to implement plans. “It doesn’t seem to make a whole lot of sense to not even allow employees ages 18 to 20 the potential to be eligible. It’s a balancing act. Do we want employees to save for retirement? We felt our recommendations to Congress were reasonable,” Jeszeck says.

Asked whether allowing younger employees who may change jobs quickly to participate would encourage more cashouts of DC balances—also hurting employees’ ability to save for retirement—Jeszeck points out that cashing out is not just an issue for young employees, and regulators and lawmakers are working on solutions to tie balances from multiple plans together and make the rollover process easier.

One may think, if these policies hurt employees’ ability to save for retirement, they go against the tenant of ERISA to act in the best interest of participants. But, Levine points out plan design decisions are settlor decisions, not fiduciary decisions. “ERISA sets contours about plan design to allow plan sponsors flexibility,” he says.

DC plan sponsors have the choice to choose automatic enrollment or immediate eligibility. Levine says he doesn’t see lawmakers mandating immediate eligibility.

But, the numbers in the GAO report could encourage plan sponsors that want to do what’s best for participants to drop eligibility requirements. “Hopefully, the report will provoke discussion within the plan sponsor community and within Congress,” Jeszeck says. “We believe these issues have not been thought about, and we want to shed some light.”