Administration July 8, 2022

Has Vesting Gotten Controversial?

Education and communication are key to getting plan sponsors and participants on the same page.
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AGAINST ALL ODDS, vesting schedules have become the stuff of headlines.

Personal-finance writers around the U.S. are offering advice and insight into how employees should regard the schedule in which they vest in their employers’ contributions to their defined contribution retirement plans.

For workers in businesses that have shorter employee tenures, a long-graded vesting schedule could be seen as unfair to workers. But for plan sponsors, vesting schedules can control costs and help with employee retention.

Safe harbor plans must follow some clear vesting rules, but beyond that, sponsors have a lot of flexibility in strategically structuring their plan’s vesting. “My book of business is probably skewed toward non-safe-harbor plans,” says Joe DeBello, managing consultant at OneDigital Retirement + Wealth in Orlando. “So the topic of vesting is a constant in our discussions.”

The Rules

Qualifying as a traditional safe harbor plan requires immediate 100% vesting for participants. A qualified automatic contribution arrangement safe harbor plan with automatic enrollment can have up to two-year cliff vesting, says Eric Droblyen, president and CEO of Employee Fiduciary, a Mobile, Alabama-based third-party administrator. “A lot of times, sponsors go with the QACA safe harbor instead of the traditional safe harbor specifically because they can do two-year cliff vesting,” he adds.

“I would say that more often than not, if somebody’s not forced to allow for immediate vesting in their plan, then most sponsors choose to subject participants to a vesting schedule,” Droblyen continues. ERISA does require that plan sponsors limit cliff vesting to a maximum of three years of service to become 100% vested, and graded vesting can take no longer than six years of service to become 100% vested. “Employers can definitely make their vesting rules more liberal, if they choose,” he says.

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The End of Vesting?

One of the primary trends that Kristi Baker and her colleagues at CSi Advisory Services are seeing is sponsors shortening their plan’s vesting period. “We’re having a lot of conversations with our clients around how to recruit and retain employees, and in looking at their retirement plan holistically, one of the issues they’re looking at is, ‘Does a six-year vesting schedule still make sense, for the kind of employees we’re trying to attract?’” says Baker, managing partner at the Indianapolis-based firm. “I’m not seeing many plans use immediate vesting unless they’re a safe harbor plan, but more commonly we see a move to a three- to four-year graded vesting schedule.”

Some employers are doing that because the shorter vesting period is more attractive to employees, Baker says. Whether employees and potential new hires actually pay attention to vesting is industry-specific, she finds. “With some employers that have a lot of hourly or part-time workers, it never comes up,” she says. “But with employers that have more executive-level positions or professional-level positions, people do look into those kind of details now.”

Vanguard’s recent “How America Saves” report found that in 2021, nearly half of plans immediately vested participants in employer matching contributions, while 25% of plans with employer matching contributions used a 5- or 6-year graded vesting schedule. The report covers 4.7 million participant retirement accounts from the more than 1,700 plans for which Vanguard serves as recordkeeper.


Usually the first step in the vesting decision tree with plan sponsors is whether they’re going to go with a safe harbor design, says Jim Sampson, national practice leader for Hilb Group Retirement Services in Cranston, Rhode Island. If not, then an employer needs to start by understanding its goals for vesting. “Are they using vesting to try to retain employees for a certain period of time? Are they using vesting to protect the company’s money?” he asks.

At that point, Sampson also wants to understand whether the employer wants to utilize its retirement plan to help attract new employees. “That is becoming a much, much larger part of the equation in the past year or two,” he says. “Because they’re having a really hard time attracting new employees, a lot of companies now are trying to beef up their entire benefits package, especially the 401(k). We’ve seen a lot of companies go to immediate or shorter vesting. The thought is, if people have to wait years to get the money, it’s not necessarily seen as a strong benefit.”

“That’s especially true when you’re talking about a higher-level employee, in maybe a technical space or medical space,” Sampson continues. “We work with a lot of pharmaceutical and biotech companies, and they’re trying to pull people out of big, big employers, so they’re trying to mirror the benefits those big employers provide. Vesting is almost a non-starter for those companies. But in other workforces—such as restaurants, hospitality and retail—where turnover is high, having a vesting schedule can make sense to an employer.” It saves the company money when an employee leaves quickly, and potentially can motivate employees to stay longer.

Sampson understands the strategic value that some employers see in having a vesting schedule. “But the reality is that vesting might be becoming a dying breed, in this post-COVID workforce we’re all experiencing. Vesting might go out the window because companies find that it’s a detractor to hiring good people,” he continues. “We live in an instant-gratification world: People want it now, and the end of vesting might be a byproduct of that.”

The Conversation Is Changing

Droblyen is asked about the pros and cons, from an employer perspective, of immediate vesting versus having a vesting schedule. “Simply put, if a sponsor goes with immediate vesting, it’s seen as a more generous plan for employees: That money is their money, as soon as it hits their account,” he answers. “The ‘pro’ of having a vesting schedule is that you’re getting some money back, if somebody doesn’t stay with you for long.”

The decision “boils down to a tradeoff” for employers, Droblyen says. “You need to pick what you think is more valuable to your business. Is it more important to have immediate vesting that’s seen as a more valuable benefit by employees, or is saving some money for the employer more valuable? I wouldn’t say there’s a hard-and-fast rule to answer that: It’s more facts and circumstances for individual employers.”

DeBello has read with puzzlement recent media coverage criticizing employers that have a vesting schedule. He doesn’t see a fairness issue with promoting the concept of an employer match to employees as “free money,” while also having multi-year vesting. “We very rarely see employers that tout, ‘It’s free money, with no strings attached.’ If you go on participant sites, almost every modern recordkeeping system is going to show participants their total balance and their vested balance. And every group education meeting for a plan that I’ve been to covers vesting,” he says. “I don’t subscribe to the idea that this is some kind of ‘bait and switch’ or mystery to employees. It is something that employers do strategically, to mitigate costs and hopefully to retain employees.”

For employers with a vesting schedule, the key is to communicate clearly about it with employees and potential hires, Baker says. “Vesting is one of the topics we often talk about in employee meetings, and we explain it in a way that’s straightforward and simple to understand: Vesting in the employer money is based upon an employee’s years of service they have with the company,” she says. “We don’t get much pushback on that.”

The debate about vesting really speaks to a broader issue that’s worth considering, DeBello thinks. “The heart of this issue is, these vesting schedules tend to impact lower-income parts of the workforce that are moving between jobs more,” he says. “I think the bigger issue with retirement security for lower-income employees is coverage: whether an employer offers a retirement plan to its employees. We’re spending too much time focusing on something [vesting] that isn’t the big issue for retirement savings.”

“The employer is giving you money as an employee, and expecting loyalty in return. I think there is nothing wrong with that,” DeBello says. “But the conversation around vesting is changing, and I have to acknowledge that. The types of jobs out there are changing—there are more ‘gig economy’ jobs, and service jobs—and maybe the conversation about vesting needs to change, too.”

Administration July 8, 2022

How the Great Resignation Is Impacting Plan Sponsors

Higher-than-usual turnover is affecting investment committees, benefits teams and service providers.
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Whether you call it the Great Resignation or the Great Reshuffle, employees from entry-level associates to C-suite executives are making career moves, motivated by pandemic-prompted introspection, rising wages and more leverage to negotiate for perks like telecommuting or flexible scheduling.

Even amid ongoing economic uncertainty, 4.4 million people quit their job in April, according to the Bureau of Labor Statistics, slightly below the record 4.5 million who jumped ship from their employer in March.

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Barb Delaney, a principal at StoneStreet Renaissance, a HUB International company, says that nearly every client she works with has experienced higher-than-usual turnover on their investment committee and their benefits team.

At the trade group Pharmaceutical Research and Manufacturers of America, or PhRMA, Robin Palchus, the organization’s chief human resource officer, says the higher turnover rate has been more of a reshuffling.

PhRMA has had several executives retire over the past year, and Palchus will join their ranks in a few months.

“In part, the last two years have contributed to my desire to retire,” Palchus says. “HR leaders and departments, in particular, bore the brunt of all the Covid-related needs and considerations, including returning to the office decision-making. And we are still dealing with it.”

That said, the upcoming departure of Palchus and several of her colleagues has had little impact on PhRMA’s retirement plan. That hasn’t been the case for all employers. For some plan sponsors, the high quit rates of the past few years—both internally and at the recordkeepers and advisers with whom they work—have created a number of challenges.

Increased Errors

One such challenge is the increase in the potential for errors, since new people may be handling an account just as transactions increase due to employees joining or leaving the plan in greater numbers.

“The people who are still there that haven’t moved on to a different company are stretched so thin,” says Audrey Wheat, manager, vendor analysis at CAPTRUST. “There is more opportunity for error because they have taken on more responsibility.”

Delaney also notes the potential for increased errors. “If you don’t teach your new payroll person about the plan rules and they enroll new people late, then the plan sponsor has to pay the penalty,” says Delaney.

Conducting regular training for all employees in the payroll, finance and human resources team can help prevent such mistakes, Delaney says, adding that her team conducts such training annually for its clients. Training everyone who touches the 401(k) in the plan rules can prevent the costs of correcting mistakes later.

More Frequent Education

Turnover in the benefits department or on plan investment committees may require even more frequent education in today’s market, Wheat says.

“There have been a lot of advisers we have worked with on RFP projects, where the adviser will mention ‘Hey, my entire committee just turned over, so I need to explain the process all over again because when we talked to them last year it was a completely different committee.’”

The Great Resignation also poses challenges for plan sponsors who may be dealing with understaffed recordkeepers or advisers, Wheat says, adding that some recordkeepers offered buyouts to their senior staff at the height of the pandemic and the 2020 recession.

“They gave the next generation promotions to step up and lead their premier relationships,” she says. “And then on top of that, you’ve since had the Great Resignation, so you shifted less experienced employees up with internal promotions, but you’re having trouble backfilling their positions.”

‘A Perfect Storm’

For plan sponsors, that may mean dealing with contacts who have less experience and who do not have the same internal support that their predecessors may have had.

“It’s been a perfect storm of shaking up relationships,” Wheat says. “The plan sponsors we have been talking to have definitely been feeling that.”

Delaney says she has heard similar stories from clients. “The recordkeepers have one person trained to be a 5500 expert and another person to do testing and another one for basic administration and payroll questions,” she explains. “But you don’t have anyone holistically who understands the plan design. So when one person leaves, it can be frustrating for the client to not be able to find someone who can answer a specific document or discrimination question.”

Such service issues have affected plan sponsors of all sizes. “We have always seen more service issues with plans on the smaller end of the market, because you’re working with less experienced people,” Wheat says.

However, service issues are now creeping into the large and mega plan space, she adds. She now fields occasional service complaints for plans with $1 billion or more in assets, which almost never happened prior to the pandemic.

One solution for plan sponsors experiencing service issues is to speak up. If your primary contact at a recordkeeper has departed, plan sponsors should keep in mind that they do not have to stick with the first new rep assigned to their account, says John Stanton, vice president of retirement services operations with Houston-based Insperity.

“Talk to that person first,” he says. “If you think you need someone with more experience and more knowledge, ask for that.”

Plan participants may also be experiencing the impact of the Great Resignation, Wheat says. “The best example there is on call center wait times,” she explains. “We have heard stories of over an hour on hold to take a loan or a simple distribution. Turnover was always high at the call centers, and now the Great Resignation has just really compounded that.”

Opportunities for Re-Evaluation

The Great Resignation has also created an opportunity for plan sponsors to take a closer look at their plan design to see whether it may need tweaking amid a larger number of participant separations.

“Plan sponsors can look at their distribution options for when they have employees leaving,” she explains. “It they only offer full distributions, this might be time to take a look at adding partial distributions, so you don’t have huge balances rolling out. You may want to incentivize people to keep their money in the plan.”

As employees remain open to other job opportunities, plan sponsors can also use their benefits as a differentiator as they compete to attract and retain talent. A Willis Towers Watson survey in April found that six in 10 employees cited their employers’ retirement benefits as an important reason they remain with their current employer, compared to just 41% of employees who said that in 2010.

“In many cases, once we explain the value of our benefits, including our competitive 401(k) plan, oftentimes that is received with an incredibly positive reaction from incoming new employees,” says PhRMA’s Palchus. “It might even make up the gap for more money.”

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