Immediate Vesting Is Better for Recruitment Than Cliff Vesting Is for Retention

An Employee Benefit Research Institute research panel focused on employee tenure argued that non-immediate vesting schedules for employer matches are an overrated retention tool. An immediate vest is a smarter recruitment tool, and vesting thresholds can often be outweighed by accepting a higher paying job elsewhere, according to the panelists.

Chantel Sheaks, the vice president of retirement policy at the U.S. Chamber of Commerce, explained that the general trend is toward immediate vesting schedules. According to research from Vanguard, 49% of DC plan participants had immediate vesting, and only 10% had three-year cliff vesting, the least generous schedule allowed by law.

Sheaks added that many sponsors use vesting as a retention tool, but she cautioned against overuse of this tactic. Employers need to weigh the lost vested contributions against the pay raise that an employee looking for a new job might be able to acquire, the same calculation the employee is assuredly making. She also noted that some employees find vesting schedules confusing or don’t know their employer’s schedule, which further undermines its use as a retention tool, since employees cannot be deterred from leaving a job by a program of which they are unaware.

Craig Copeland, the wealth benefits research director at EBRI, agreed and added that a higher-paying job can often outweigh the forfeited contributions from missing a vest threshold. An employee might consider the forfeiture heavily if they are very close to a vesting threshold, but often that employee will ask their new employer for a delayed start in order to meet that threshold. He added that leaving jobs can sometimes be bad for one’s retirement security if the participant forfeits a lot of money due to their vesting schedule, but as a general rule, the increase in pay from a new job will more than compensate for the short-term loss.

While the panel agreed vesting schedules can be overrated retention tools, Sheaks said having an immediate vest can be a great recruitment tool. If an immediate vest is someone else’s recruitment tool, it would further undermine the retention value of a delayed vest.

Copeland noted that defined-contribution-eligible workers tend to stay longer than those that are not eligible for DC plans. According to 2019 data from the Survey of Consumer Finances as cited by EBRI, 24.5% of eligible employees have a tenure of two years or less, whereas 50.8% of ineligible employees have a tenure of two years or less.

Sheaks highlighted a provision in the SECURE 2.0 Act of 2022 that will allow employer contributions to be added on a Roth basis: The employee pays income tax on the contribution as ordinary income, in order to receive it into a Roth account. SECURE 2.0 mandates that such contributions be immediately vested, though offering a Roth match is voluntary. Sheaks said this requirement will likely deter many employers from using it at all, but it could make some employers reconsider their vesting schedules or, alternatively, offer one schedule for Roth and another for traditional.

Copeland also explained that workplace tenure tends to be higher for men than for women (5.1 vs. 4.7, narrower than the 1983 datapoints of 5.9 and 4.2), and for whites than Blacks and Hispanics. This means non-immediate vesting schedules tend to do more damage to the retirement savings of underrepresented demographic groups.