Eligibility Policies and Relevant Laws

The Employee Retirement Income Security Act of 1974 (ERISA) provides  the legal framework for eligibility policies used by workplace retirement  plans, including minimum-age and minimum-service policies. The rules  were designed, in part, to help sponsors provide profit sharing  contributions, but after 401(k) plans were introduced, employer matching  contributions became common. Treasury is  responsible for developing proposals for legislative changes, which could  include changes regarding eligibility and vesting requirements. Many Plan Sponsors In Our Survey Use Policies that Determine Workers’ Eligibility to Save in 401(k) Plans and to Retain Employer Contributions, Often to Reduce Costs and Employee Turnover

		Many Plan Sponsors In Our Survey Use Minimum- Age and Minimum-Service Policies to Determine Plan Eligibility

Information from our non-generalizable survey of 80 plan sponsors  ranging in size from fewer than 100 participants to more than 5,000, and  our review of industry data, show that many 401(k) plans have minimum- age policies that do not allow workers to save in plans until they reach  age 21 instead of immediately upon employment. Many Plans Have Vesting Policies that Affect Participants’ Ability to Retain Employer Contributions

Based on our survey of 80 plans, we found that 57 have vesting policies  that require employees to work for a certain period of time before the  employer contributions in their accounts are vested. Industry data from Vanguard show that  more than 55 percent of its plans also have vesting policies for matching  contributions. Our Projections Suggest that Plans’ Use of Minimum-Age and Minimum-Service Policies Can Reduce Workers’ Access to Workplace Retirement Plans and Can Result in Foregone Retirement Savings

Currently, the law permits 401(k) plans to require a minimum age of 21  and at least 1,000 hours of service over 1 year for a worker to be eligible  to join an employer’s 401(k) plan. For example, based on analysis of our  hypothetical scenario, the savings of an otherwise eligible 18-year-old  earning $15,822 per year could have been $134,456 at retirement, or  $36,422 in 2016 dollars, if that individual had also received an employer  match of their contribution up to 3 percent of salary from age 18 to 20. Additionally, the more often a worker changes jobs the larger the potential  effect of a minimum-service eligibility policy on the worker’s retirement  savings (see fig. Our Projections Suggest that Current Employer Contribution Policies Can Also Reduce Workers’ Retirement Savings in 401(k) Plans

Current law permits 401(k) plan sponsors to require participants to be  employed on the last day of the plan year to be eligible to receive  employer contributions to their account. Information from our survey of 80 plan sponsors  and plan professionals showed that plan sponsors often use these two  requirements together. Although plan  sponsors may have previously found these two policies to be beneficial,  our projections suggest they may also potentially reduce workers’  retirement savings. Last Day Policies Can Reduce Workers’ Retirement Savings, Based on Our Projections

The law permits plans to apply policies that limit a participant’s ability to  receive employer contributions without additional service each year—last  day policies—which can reduce participants’ potential retirement savings. Given a relatively mobile  workforce, the requirement to be employed on the last day of the plan  year to receive an employer’s contributions for that year puts workers who  separate from their job at risk of losing some of their potential retirement  savings. (See Appendix II Table 8 for examples of how a last day  policy could potentially reduce retirement savings.) For example, our projections suggest that  for a worker who twice separates from employment (at age 20 and 40)  after 2 years without satisfying a 3-year cliff vesting policy, forfeiting the  employer contributions already in their account, the lost savings could  have grown to $81,743 by retirement ($22,143 in 2016 dollars). However, a Treasury official told  us that the agency has not recently proposed any changes to the vesting  rules and has not conducted an assessment to determine what vesting  policies are appropriate today. Clearer Policy Descriptions by 401(k) Plans Could Help Participants to Better Understand Eligibility and Vesting Policies GAO’s Nongeneralizable Survey Found that While Knowledge Varied, Some Plan Participants Lacked Knowledge on Eligibility, Employer Contribution, and Vesting Policies

To examine plan participants’ understanding of eligibility, employer  contribution, and vesting policies, we analyzed 46 responses to an online  survey administered to participants in four 401(k) plans in which they  were asked about their own plans. Given  the mobility of today’s workforce, all workers are potentially affected by  these policies. With respect to our recommendation that Treasury evaluate existing  maximum vesting policies, Treasury had no formal comment. Appendix I: Objectives, Scope, and Methodology

	Overview of Objectives, Scope, and Methodology

This report examines: (1) what is known about the prevalence of 401(k)  plans’ eligibility and vesting policies and why plans use them, (2) the  potential effects of eligibility and vesting policies on workers’ retirement  savings, and (3) participants’ understanding of these policies. We also interviewed officials from the  Department of Labor, Treasury, the Internal Revenue Service, and the  Securities and Exchange Commission, as well as a total of 21 retirement  professionals and academic researchers to discuss what is known about  these policies’ effects on savings over time.
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.

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.

What GAO Recommends

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.