The primary method of saving for retirement for millions of American workers is 401(k) plans. But a recent report issued by the U.S. Government’s Accountability Office (GAO) indicates that many 401(k) plans are still clinging to archaic rules that hinder plan participants’ ability to save and revisions are sorely needed that will make these plans more relevant and easier for employees to use.
The GAO focused on 80 total plans with memberships ranging from less than 100 employees to plans with over 5,000 participants. Several major changes can be made to these plans in order to bring them up to date with a more mobile workforce and grow the total number of participants in them. (For more, see: Are High 401(k) Fees Putting Your Retirement At Risk?)
Some of the practices found in the plans that the GAO found to be a hindrance to participants included maintaining a minimum age limit of 21 for participants, preventing younger employees from participating in the plan, as well as requiring employees to work for the employer for at least one year before they can participate. Many plans then also make employees wait for another year before they are eligible to receive any matching contributions and then satisfy a longer vesting schedule before they can take their matched contributions with them when they leave. Of course, many employers impose these limits to reduce turnover and save themselves from bureaucratic hassles that come from plan participants who only participate for a short time, such as a few months.
But the report notes that the statistics gathered by the Bureau of Labor showed that the average tenure of an American worker in 2014 is 4.1 years, and other data revealed that the average number of jobs held by Americans aged 18 to 48 sits at 11. “Being ineligible to save in a new employer's plan for 1 year on 11 occasions, especially occurring more frequently early in a worker's career, may result in $411,439 less retirement savings ($111,454 in 2016 dollars),” the report projects. (For more, see: How to Cure an Ailing 401(k).)
Much of the data in the report is also reflected in other industry findings such as from Vanguard Group and the Profit Sharing Council of America. Other projections that the GAO made in its report include a loss of $36,422 at retirement in 2016 dollars for an 18-year-old employee who has to wait for three years before receiving matching retirement plan contributions. An employee who leaves a plan that requires him to be employed on the last day of the year in order to receive the employer’s matching contribution can lose up to $8,150 in retirement savings in 2016 dollars if he is 30 years old and makes just over $70,000 a year, and the plan has a 3% match.
Vesting schedules were another key area that the report addressed. Data in the report indicated that employees with a history of working jobs where they leave before the cliff vesting schedule is reached are forfeiting a substantial amount of retirement income. The report suggested that “a re-evaluation of these caps would help to assess whether they unduly reduce the retirement savings of today's mobile workers.”
The Bottom Line
Many of the plans that were analyzed in the report have not changed their vesting schedules in the past five years. Employers use these schedules to encourage employee retention and reward those who remain with the company for a longer period of time. But the Office report indicates that it may be time to make some changes in order to better provide for employees’ retirement security. (For more, see: Is Your 401(k) Being Mismanaged?)