Ask the Experts April 24, 2018

(b)lines Ask the Experts – Implementing a Vesting Schedule When There Wasn’t One

“We currently sponsor an Employee Retirement Income Security Act (ERISA) 403(b) plan where all contributions are 100% vested. However we are contemplating amending the plan to install a 5-year graded schedule for employer contributions.
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“We know that the new schedule would apply to those hired after the effective date of the amendment, but how would the new vesting schedule affect existing plan participants? Would their vesting change?”

 

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Stacey Bradford, with Groom Law Group, answers:

You have identified a complicated plan design issue for employers.

A change to a vesting schedule that lengthens the period of service required to become 100% vested in employer contributions to an ERISA 403(b) plan is subject to certain requirements under ERISA that protect current participants. ERISA section 203(c)(1)(A) prohibits reducing a participant’s vested percentage in his plan account as of the date prior to the effective date of the change. Therefore, current participants must retain their 100% vested interest in their accounts as of the date prior to the effective date of the new vesting schedule, and the new vesting schedule may apply only to contributions made on and after its effective date. 

In addition, under ERISA section 203(c)(1)(B), participants with at least three years of service with the employer must have the opportunity to elect to remain under the prior vesting schedule. Thus, as a practical matter, a 100% vesting schedule will continue to apply to new contributions on behalf of participants with three years of service. 

Although the new vesting schedule may be applied to participants with less than three years of service, an employer may choose to treat all current participants the same and apply the new vesting schedule only to new hires. With any vesting schedule change, it is critical to communicate clearly to your plan’s recordkeeper the new vesting schedule and to whom it applies. As always, please consult your plan’s legal counsel if you are contemplating an amendment to your plan.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

 

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Data and Research April 24, 2018

Health Care Expenses Shaking Retirees’ Confidence

More than four in 10 retirees report that their health care expenses in retirement are higher than they expected and one-quarter say long-term care costs have been higher.

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Retirees’ confidence in their ability to live comfortably in retirement remains higher than employees’ confidence, with 32% of retirees very confident and 44% somewhat confident, according the Employee Benefit Research Institute’s (EBRI) 28th annual Retirement Confidence Survey (RCS).

However, retirees are less likely than last year to feel confident in their ability to handle basic expenses and feel less confident in their ability to handle medical expenses. More than four in 10 retirees report that their health care expenses in retirement are higher than they expected and one-quarter say long-term care costs have been higher.

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The RCS found that being healthy increases retirement confidence: 46% of retirees who are confident are in good health, compared to 14% who are not confident. The same is true for employees: six in 10 employees who are in good health are confident, compared to 28% of those not confident. The survey report says retirees in fair or poor health are more likely to have difficulty managing their money in retirement, including maintaining their pre-retirement lifestyle, managing day-to-day finances and managing health care costs.

Only 39% of retirees and 19% of employees have tried to calculate how much money they will need to cover health care costs in retirement. The survey finds that retirees who made this calculation are less likely to have experienced higher-than-expected health care costs are and more likely to say costs are as they expected. Seven in 10 employed workers and six in 10 employed retirees say workplace education on health care planning for retirement would be helpful.

The survey also found two-thirds of retirees report that converting their assets into income is a relatively easy task for them. Asked about their withdrawal strategies from defined contribution (DC) plans and individual retirement accounts (IRAs), many retirees aren’t withdrawing much from them. Four in 10 draw only the legally required minimum, and among those who withdraw more than the minimum, many withdraw only as needed.

This confidence in retirement income could be because more than four in 10 retirees report that a defined benefit (DB) plan is a major source of income, and two-thirds report Social Security is a major source of income. Comparatively, only about one-third of employees believe Social Security will be a major source of retirement income, and only 32% expect a DB plan to be a major source of income.

EBRI’s 2018 RCS report is here.

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