401(K) Plans: Effects of Eligibility and Vesting Policies on Workers' Retirement Savings
Released: 2016-11-21T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: 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.

section_title: What GAO Found
paragraphs: 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.

section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: Employers frequently sponsor and contribute to defined contribution  plans, such as 401(k) plans, in which workers can save for retirement.  Workers can contribute to these plans before taxes are applied, which  can encourage them to establish and grow their retirement savings. The  amount of foregone federal tax revenue associated with defined  contribution plans, estimated at $62.1 billion in fiscal year 2015, reflects  the prevalence of workplace plans as a source of retirement security.  Plan sponsors—employers who offer 401(k) plans—have the authority  and flexibility to customize certain aspects of plans, but such  customization can also affect workers’ retirement savings. For example,  some plan sponsors may use eligibility policies to limit enrollment in their  plans and use vesting policies to limit participants’ ability to keep  employer contributions upon leaving their job.

Federal policy encourages workers to save for retirement through  employer plans, and has removed some barriers that prevent plan  participants from saving, such as by facilitating automatic enrollment and  automatic increases in savings rates in workplace plans. Researchers  have also studied the efforts of different groups of workers in saving for  retirement by comparing groups and outcomes by age, gender, race, and  other factors. However, few studies have looked at the effects of eligibility  and vesting policies on a participant’s ability to save for retirement in a  workplace plan and to keep employer contributions when changing jobs  throughout their career. You asked us to look at plan sponsors’ use of  eligibility and vesting policies. 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 effect of eligibility and vesting  policies on workers’ retirement savings, and 3) participants’  understanding of these policies.

To identify what is known about the prevalence of eligibility and vesting  policies, we developed a non-generalizable survey of plan sponsors and  plan professionals. This web-based questionnaire included questions on  401(k) plans’ use of eligibility and vesting policies. Beginning in May  2015, we provided online access to the survey through the publications of  three industry groups who agreed to help notify their members and  readers about our survey. We also included a link to the survey in an  online forum for American Society of Pension Professionals and Actuaries  (ASPPA) members, who are owners or senior managers of plan  administration firms. We received and accepted responses through  August 31, 2015. We received 80 responses from plan sponsors and plan  professionals regarding plans ranging in size from less than 100  participants to more than 5,000. In addition, we reviewed industry survey  data, plan data from a large 401(k) plan record keeper, and U.S. Census  Bureau (Census Bureau) data. We assessed the reliability of these data  by interviewing the staff who maintain the data, reviewing related  documentation, and testing the data for missing or erroneous values. We  determined that the data we used were sufficiently reliable for our  purposes. To examine why plans use eligibility and vesting policies, we  included questions in our survey about what factors were important to  plans in choosing specific policies. We based these questions on  information we obtained from interviews and a discussion group with plan  professionals. The survey also provided respondents with the opportunity  to cite their own reasons for using eligibility and vesting policies. We also  interviewed officials from the Department of Labor (DOL), Treasury, the  Internal Revenue Service (IRS), and the Securities and Exchange  Commission, as well as a total of 21 retirement professionals and  academic researchers to obtain their perspectives on why plans use  eligibility and vesting policies. The views of the individuals we interviewed  are not generalizable and therefore do not represent all potential views on  eligibility and vesting policies.

To examine the policies’ potential effects on retirement savings over time,  we developed hypothetical scenarios based on assumptions drawn from  federal and industry data sources. Most of these projections assume  contributions that are based on medium scaled lifetime earnings factors  developed by the Social Security Office of the Chief Actuary (OCACT).  We also interviewed academic researchers and retirement professionals,  as described above, on what the policies’ effects on retirement savings  were likely to be.

To examine workers’ understanding of eligibility and vesting policies, we  administered a nongeneralizable questionnaire to employees of four  companies and tested the accuracy of their answers against the policies  in their plans’ documents. We asked plan sponsors who responded to our  plan sponsor survey and provided contact information if they would help  us by voluntarily inviting their 401(k) plan participants to complete a  questionnaire regarding their eligibility and vesting status in the plan. Four  companies agreed to help us facilitate this participant questionnaire. We  analyzed the accuracy of responses from 46 401(k) plan participants by  comparing their responses about plan policies against the summary plan  descriptions for their actual plans. This allowed us to determine the  accuracy of their knowledge rather than rely on their self-reported  knowledge. To understand what sources of information on eligibility and  vesting policies participants may have, we analyzed survey responses  from the 80 plan sponsors and plan professionals which identified the  methods used by plans to communicate these policies. In addition, we  interviewed retirement professionals and academic researchers to get  their perspectives on participants’ understanding of their plan’s eligibility  and vesting policies. See Appendix I for additional information on our  methodology.

We conducted this performance audit from January 2015 to October 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Types of Contributions in a 401(k) Plan
paragraphs: A 401(k) plan provides eligible plan participants the opportunity to choose  to contribute a portion of their earnings, commonly called elective  contributions, to their own individual account in a retirement plan. These  contributions may be taken out of an employee’s salary before taxes.  Some employees affirmatively enroll in their plan and elect how much of  their pay they want to contribute. These employee contributions can be a  set dollar amount or a percentage of pay, within annual contribution limits  set by the IRS. Some employees are automatically enrolled in  employers’ plans and their contributions set at a default rate, though they  can opt to adjust the contribution level later. Under federal law, an  employee’s own contributions and any returns on those contributions  always belong to the employee and are not forfeitable to the plan if they  leave their employer.

An employer may also contribute to a participant’s account, though not  every plan includes an employer contribution. Generally, employers’  contributions to participants’ 401(k) accounts are voluntary, though once  incorporated into plan documents contributions must be made as  described. Unless the plan is a “Safe Harbor 401(k)”, “SIMPLE 401(k)”  plan, or a “SIMPLE IRA”, plan sponsors have flexibility to decide whether  to provide employer contributions and how quickly these contributions  become vested, to the extent permitted by federal law. Formulas used  to calculate employers’ contributions vary across plans. One form of  employer contribution is called a match, which is based on the amount  that an employee contributes to the plan. Alternately, employers may  provide non-matching contributions based on employer profits. Employer  contributions may be made solely at the employer’s discretion or may be  required by plan documents. Unlike an employee’s own contributions,  employer contributions can be forfeited when an employee separates  from their job if the employee is not vested in the plan.

section_title: Eligibility Policies and Relevant Laws
paragraphs: 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. Under ERISA, the maximum age that  plans may require as a condition of plan eligibility is 21. The maximum  period of service—or length of tenure with an employer—a 401(k) plan  may require for plan eligibility is 1 year. (See table 1.)

In addition to using eligibility policies, plans can extend the waiting time  by taking up to 6 months or until the end of the plan year, whichever  comes first, to enroll a newly eligible worker.

section_title: Vesting Policies and Relevant Laws
paragraphs: A 401(k) plan’s vesting policy can require participants to work for a certain  period of time with an employer before they can keep all or some of their  employer’s contributions to their account and investment returns on that  money when they leave their job. Federal laws require that a minimum  percentage of employer contributions are vested after a certain period of  time; however, plans can choose to allow employer contributions to vest  faster or even immediately. The shorter the period of service required  for 100 percent vesting, the “faster” the vesting. The minimum percentage  that must be vested at a given time depends on the type of vesting policy  used by the plan, either cliff or graduated (see table 2).

Employer contributions that are vested are considered “nonforfeitable,”  which means a participant has an unconditional and legally enforceable  right to keep that portion of their account if they separate from their job.  When a vesting policy’s required period of service is not fully met, some  or all of an employee’s account balance that is attributable to employer  contributions is forfeited to the plan. (See figure 1.)

Forfeited money can be used by the plan to offset plan expenses and to  offset employer contributions. Once the full vesting period is complete,  all employer contributions made both before and after that point are fully  vested and nonforfeitable. All of a participant’s own contributions,  rollovers, and earnings on those contributions are always immediately  vested and nonforfeitable.

Similarly, in addition to a minimum-service policy required to receive  employer contributions, plans may use a “last day policy,” which can  require up to an additional year of employment to earn the employer  contribution for that year. When used, a last day policy applies to the  employer contributions made each plan year, year after year (see fig. 2).  According to recent industry data, plans offer matching contributions more  commonly than non-matching contributions, which include profit sharing  contributions.

ERISA also governs the timing of employer contributions. Employers may  delay making contributions until their tax return due date for a given year,  including extensions.

section_title: Plan Policy Information Provided to Participants
paragraphs: Under federal law, plan sponsors must provide participants with a basic  description of the plan, called a summary plan description (SPD), that  explains participants’ rights and responsibilities under the plan as well as  the plan’s key features, including eligibility and vesting policies. Table 3  provides some key features of an SPD and other required plan  documents.

section_title: Treasury, IRS, and DOL Oversight of Eligibility and Vesting Policies Used by 401(k) Plans
paragraphs: Treasury and IRS, an agency within Treasury, share responsibility for  overseeing provisions of ERISA applicable to eligibility and vesting in  401(k) plans. IRS has primary responsibility for overseeing eligibility and  vesting policies and has promulgated regulations in these areas. For  example, IRS regulations state that plans risk losing their tax qualified  status if they impose policies that 1) do not specifically refer to service but  have the effect of requiring service as a condition for plan participation,  and 2) ultimately result in employees being excluded from participating in  the plan for a period of time that exceeds the plan’s stated minimum  service policy. IRS has also promulgated regulations for rules relating to  “year of service.” Additionally, IRS regulations and federal law address  the timing of employer contributions–when they must be deposited into  participants’ accounts in a defined contribution plan. Treasury is  responsible for developing proposals for legislative changes, which could  include changes regarding eligibility and vesting requirements. In fulfilling  this duty, Treasury prepares the “General Explanations of the  Administration’s Revenue Proposals,” referred to as the “Greenbook,”  which accompanies the President’s annual budget submission and  outlines the President’s tax-related legislative proposals.

DOL is responsible for prescribing regulations governing retirement plans  in a variety of areas, including reporting, disclosure, and fiduciary  requirements. According to DOL officials, DOL could issue guidance on  best practices to plan sponsors to help them better communicate plan  policies in the summary plan description (SPD). With regard to eligibility,  vesting, and related policies, DOL regulations impose certain  requirements, such as the requirements that plans:

Transmit employees’ own contributions into their account no later than  the 15th day of the month following the month in which the money  comes out of their pay.

Report and disclose certain information to participants regarding  eligibility and vesting policies. ERISA specifically grants DOL the  authority to prescribe the format and content of the SPD and other  statements or documents which are required for plan participants and  beneficiaries receiving benefits under a plan. In addition, DOL may  prescribe regulations covering the format of these disclosures.

section_title: Mobility of the U.S. Labor Force
paragraphs: U.S. workers are likely to have multiple jobs throughout their careers.  Each time an employee begins a new job where a 401(k) plan is offered,  the plan’s eligibility policy may affect the employee’s ability to participate.  Likewise, every time a plan participant leaves a job, the plan’s vesting  policy may affect the participant’s ability to retain employer contributions  to their account. According to workforce data collected by the federal  government, from 1978 to 2012, the average number of total jobs held by  men and women workers from age 18 to 48 was more than 11 (see table  4). The mobility of the U.S. workforce is also reflected by the median  tenure, which was 4.1 years for private sector workers in January 2014,  according to Bureau of Labor Statistics (BLS) data.

Since these data indicate that many U.S. workers switch jobs multiple  times during their career, eligibility and vesting policies may affect their  accumulated retirement savings multiple times as well. The President’s  Fiscal Year 2017 Budget Proposal encourages efforts to better ensure  that workers’ job changes do not harm their retirement savings in a  package of proposals aimed at increasing workers’ access to retirement  plans and increasing the portability of their retirement savings and  benefits. The proposal tasks DOL with evaluating existing portable  benefits models and examining whether changes are needed.

section_title: 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
subsections: section_title: Many Plan Sponsors In Our Survey Use Minimum- Age and Minimum-Service Policies to Determine Plan Eligibility
paragraphs: 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. Our survey data found  that 43 of 80 plans surveyed have minimum-age policies for plan  eligibility, with 21 being the most frequently used minimum age, used by  33 plans. Industry data from the Plan Sponsor Council of America  (PSCA), which primarily cover large plans, also show that 376 out of 613  plans have minimum-age policies, with 21 the most frequently used  minimum age.

According to our analysis of 2008 Survey of Income and Program  Participation (SIPP) data from the Census Bureau, an estimated 405,000  workers whose employers offer 401(k)-type plans said they were  ineligible to participate in the plan because of a minimum-age policy.  This is equal to about 2 percent of workers nationwide who were not  participating in 401(k)-type plans offered by their employers that year.

Minimum-service eligibility policies require employees to work for an  employer for a certain period of time before they can enroll and  participate in a 401(k) plan. Fifty of the 80 plans we surveyed reported  they have minimum-service eligibility policies. Twenty plans use a 1-year  minimum. Industry data from Vanguard also show that about 40 percent  of its plans have minimum-service eligibility policies, with a 1-year  requirement the most prevalent policy among these plans. The Census  Bureau’s SIPP data show that an estimated 16 percent of U.S. workers  who do not participate in 401(k)-type plans offered by their employers  said it is because they have not worked long enough. Projected to the  total workforce nationwide, this would amount to about 3 million workers  who are not able to save in their employers’ 401(k) plans because of a  minimum-service eligibility policy.

Certain types of 401(k) plans may be more likely than others to have  policies that require employees to complete a minimum period of service  before they can save in the plan. Vanguard found, among its plan clients,  that small plans are more likely than large plans to use minimum service  eligibility policies. PSCA also found that small plans are more likely to  use minimum-service policies, as their data show that the percentage of  plans with a minimum-service eligibility policy decreases as plan size  increases.

Under federal law, plans have discretion to require a period of minimum  service for plan eligibility, and some discretion on how long that period will  be and how service will be measured. Our survey found that of 80 plans,  20 required employees to work a certain number of hours per year to be  credited with a year of service for the purpose of meeting a plan’s  minimum-service eligibility policy. Of those 20, 12 required employees to  work 1,000 hours during the year, which is the maximum number of hours  that may be required under current law. PSCA data covering a larger  number of plans show that the 1,000 hour minimum is a common service  requirement, used by about 30 percent of plans. According to the most  recently available SIPP data, an estimated 24 percent of U.S. workers  who reported that they do not participate in their employer’s plan said  they do not do so because they do not work enough hours during the  year.

section_title: Many Plans Use Policies that Affect the Receipt and Timing of Employer Contributions
paragraphs: Minimum-service policies that govern the receipt of employer  contributions can prevent plan participants from receiving them. In our  survey of 80 plans, 34 reported minimum-service policies for employees  to receive employer contributions. Vanguard data show that about 50  percent of plans have such policies, with a 1-year minimum-service policy  being the most frequent. Employers can use these policies in addition to  minimum-service policies for 401(k) plan eligibility—which determine a  participant’s ability to save his or her own earnings in a plan—but ERISA  caps the length of service needed to receive employer contributions at 2  years. Therefore, after a 1-year minimum-service policy for plan eligibility,  a plan could only require 1 additional year of service prior to a participant  receiving employer contributions.

The receipt of employer contributions can also be limited by “last day  policies”, which are additional policies that can, in some cases, prevent a  participant’s receipt of employer contributions. These policies require  workers to be employed on the last day of the plan year to be eligible to  receive an employer contribution for that year. Plans can use these  policies alone or in combination with minimum-service policies. Whether a  worker leaves a job voluntarily or is laid off or fired, the worker can be  affected by a last day policy even after satisfying up to a 2-year service  policy for employer contributions. Our survey of plans found that 19 of 80  plans have last day policies.

Delaying employer contributions to employees is another policy that can  affect the receipt of employer contributions. Twenty-four plans we  surveyed provide contributions, including all types of employer  contributions, on an annual basis instead of quarterly or per pay period.  With regard to matching contributions, PSCA’s survey found that 18  percent of plans make those contributions on an annual basis rather than  on a more frequent schedule (see fig. 3). Our survey data also show  that plans often use an annual schedule for contributing to participant  accounts in concert with a last day policy. In total, 12 of the 24 plans we  surveyed that provide contributions on an annual basis said they also  have last day policies.

According to Treasury officials, delaying employer contributions so that  they are non-concurrent with pay periods, such as making annual  contributions, is a long standing practice put into place when employers  with defined contribution plans made only profit sharing contributions.  Under federal law, plans may make matching contributions as late as the  date the plan files its tax return for the previous year, including any  extensions, which means that a participant could receive matching  contributions for the entire previous year as late as September of the  following year. (See fig. 4.)

section_title: Many Plans Have Vesting Policies that Affect Participants’ Ability to Retain Employer Contributions
paragraphs: 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. Among survey  respondents, a 6-year graduated vesting schedule was used most  frequently, meaning a worker must complete 6 years of employment  before all of their employer contributions to their account would be  retained if they left their job. Industry data from Vanguard show that  more than 55 percent of its plans also have vesting policies for matching  contributions. A 5-year graduated vesting policy was the most frequent.  We also found that plans do not often change their vesting policies. For  example, about 70 of the 80 plans we surveyed had not changed their  vesting policies over the past 5 years. A retirement professional we  interviewed concurred that vesting policies have remained stable in  recent years.

section_title: Plans Use Eligibility and Vesting Policies to Lower Costs and Reduce Employee Turnover
paragraphs: Based on our survey of plan sponsors and interviews with academic  researchers, retirement professionals, and government officials, we found  that plans cited lowering costs and reducing employee turnover as the  most important reasons for using eligibility, vesting, and other related  policies. Our survey asked respondents to identify the importance of  various reasons for having eligibility and vesting policies (see table 5).

According to retirement professionals, plans use policies that restrict plan  eligibility to reduce administrative costs—which include maintaining  accounts for separated, short-tenured workers—although these costs are  often borne by participants and not by plans. A retirement professional we  interviewed explained that after a worker separates from an employer, the  plan sponsor must still keep track of the former worker’s account if the  worker remains a participant in the plan, and provide the worker with plan  communications and account statements, all of which are additional  administrative costs. Several retirement professionals we interviewed  noted that plan sponsors pay the administrative costs of maintaining  small, dormant accounts after short-tenure workers leave their  employer. Because young workers have shorter average tenure than  older workers, according to federal workforce data, some plans may use  a minimum-age policy to exclude the youngest workers and reduce the  administrative costs of dealing with short-tenured employees joining the  plan and then leaving. However, it is unclear the extent to which  additional plan participants increase plans’ administrative costs. Our prior  work found that participants generally paid part or all of administrative  fees, and that regardless of who incurs added administrative costs for  accounts left behind by workers, plans are not obliged to maintain those  accounts. Plans can require account holders to transfer their savings out  of the plan if their balances fall below a threshold set by federal law.

Reducing the direct costs of employer contributions was also cited by  plans that we surveyed as an important reason for using eligibility  policies, although savings for some plans may be minimal. Minimum- age policies reduce costs because employers do not need to make  contributions to otherwise eligible workers. If plans do not use minimum- age policies they can incur some added direct costs in the form of  employer contributions to additional workers. However, our projections  suggest that the direct costs associated with including workers under age  21 in existing plans may be small because younger workers earn less, on  average, than older workers, so the same percentage match from the  employer costs less for younger workers. According to a retirement  professional, plans may use a minimum-service policy for employer  contributions to reduce costs for sponsors because the sponsor avoids  making contributions to a participant account if that worker leaves their  job before satisfying the policy.

Eligibility policies and policies that delay employers’ contributions until the  end of the year are also used by some plans for administrative  convenience, according to government officials we interviewed and plans  we surveyed, though delayed enrollment is possible without delayed  eligibility and today’s employer contribution formulas make delayed  employer contributions often unnecessary. First, government officials said  that some plans may use eligibility policies to delay workers’ enrollment  because it takes administrators time to determine eligibility and to process  workers’ enrollment in the plan. However, plans may delay a worker’s  enrollment up to 6 months after eligibility, which can help plans to mitigate  administrative concerns. According to PSCA’s survey, about 25 percent  of 401(k) type plans delay the enrollment of newly eligible workers and  the rest enroll workers “anytime” after they are eligible. Moreover, a  retirement professional told us that, for medium and large-size plans, the  payroll systems used to administer plan benefits can support the  provision of employer contributions during the year as opposed to just at  the end of the year. Second, some plans that we surveyed indicated they  also delay employer contributions until the end of the year for  administrative convenience. For example, one respondent reported that it  is less work for the plan to make employer contributions once, at year’s  end. However, a government official told us that the reason most plans  make employer contributions each pay period is that doing otherwise  would have adverse effects on the plan sponsor by requiring a large  outflow of cash at the end of the plan year. By making employer  contributions more frequently, a company can spread that cost over the  year. A retirement professional told us a likely reason that some plans  make delayed employer contributions is employer inertia in keeping a  policy that is a remnant of the past, when employer contributions were  based on the employers’ year-end profits. However, today, most plans  are 401(k) plans and often provide matching employer contributions  based on participants’ own contributions, which are typically made each  pay period.

Vesting policies can also reduce costs for plan sponsors by resulting in  forfeited employer contributions when participants separate without fully  satisfying the vesting policy. Those forfeitures can offset employer  expenses and contributions. According to retirement professionals we  interviewed and plans we surveyed, vesting policies reduce the direct  cost of employer contributions for shorter-tenure employees who do not  stay employed long enough to satisfy the vesting policy and keep  employers’ contributions. However, tax benefits to employers from  making employer contributions can partially offset direct costs to  employers of making contributions to participant accounts, because they  reduce an employer’s taxable corporate income in proportion to the  amount spent on contributions.

Finally, both eligibility and vesting policies were also used to reduce  employee turnover by plans we surveyed. Retirement professionals and  an academic researcher we interviewed explained that some plans see  delayed eligibility in the 401(k) plan as an incentive that may convince  new employees to stay longer in their job. Sponsors also use vesting  policies to reduce turnover, according to government officials, retirement  professionals, and an academic researcher we interviewed. For example,  a retirement professional said that companies with a generous matching  contribution and high employee turnover prefer to use a vesting schedule  because it incentivizes employees to stay with the employer. However,  the extent to which vesting policies are effective in changing behavior and  reducing turnover depends in some measure on whether participants  actually understand vesting policies. For example, if a participant  incorrectly believes he or she is fully vested but is actually only partially  vested, the vesting policy will not effectively incentivize the worker to  extend tenure to fully vest.

section_title: GAO Hypothetical Projections Suggest Current Plan Eligibility, Employer Contribution, and Vesting Policies Can Result in Lower Retirement Savings
paragraphs: Plan sponsors use eligibility and vesting policies for a number of reasons.  However, based on our projections, we found that although the effects on  a worker’s retirement savings can initially be minimal from policies  affecting plan eligibility, eligibility to receive employer contributions and  the timing of those contributions, and vesting of employer contributions,  the cumulative effects can potentially result in significantly lower  retirement savings, depending on the policies used (see table 6). (Also  see Appendix II for detailed information about the assumptions used in  these hypothetical projections.)
subsections: section_title: 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
paragraphs: 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. As discussed earlier, we found that plan  sponsors may use these policies to reduce the costs and challenges  incurred when short-term workers enroll in the plan and leave behind  small accounts. While the law gives plan sponsors flexibility in  establishing plan eligibility policies that meet their needs, federal caps on  minimum age and minimum service policies serve to balance plan  sponsors’ needs with workers’ interests in accessing and saving for  retirement in workplace plans. In addition, because of the potential for  compound interest to grow savings over time, it is a widely accepted best  practice for workers to start saving for retirement as early as possible,  even if the amounts they save seem small. Our projections suggest that  these eligibility policies can potentially reduce workers’ retirement  savings.
subsections: section_title: Our Estimates Suggest that Plans’ Use of Minimum-Age Policies Can Reduce Workers’ Access to Retirement Plans and Accumulation of Savings
paragraphs: Our estimates, which project hypothetical retirement savings, suggest that  minimum-age policies can potentially reduce young workers’ future  retirement savings. Minimum-age eligibility policies can lower workers’  potential retirement savings through the loss of compound interest as well  as employer contributions, and the policies disproportionately affect some  groups. Because minimum-age policies can prevent young workers from  saving for retirement in their workplace 401(k) plan early in their careers,  they miss the opportunity to accrue compound interest and grow their  initial contributions over the remaining decades of their working life. For  example, an 18-year-old worker earning $15,822 per year who is  ineligible to enroll in an employer’s plan until age 21 may forego savings  at retirement of $85,857 ($23,258 in 2016 dollars) if they had been able  to save and invest 5.3 percent (the average contribution level for non- highly compensated employees reported by plans in PSCA’s 57th Annual  Survey) of their salary over those 3 years.

Because of the effects of compound interest, saving for retirement at a  young age is a one-time opportunity to optimize retirement savings  despite making what is typically a low salary relative to lifetime earnings.  An older worker has to save more to make the same gains over time,  because the returns on savings made later have fewer years over which  to compound. (See fig. 5.) (Also see Appendix II for detailed information  about the assumptions used in these hypothetical projections.)

Minimum-age eligibility policies may have disproportionate effects  for some groups. Based on our analysis of data and estimates, we  found that certain groups can be disproportionately affected by a  minimum-age eligibility policy for 401(k) plans. For example, many young  people graduating from high school will not enroll in college but will enter  the workforce, only to be potentially excluded from an employer’s 401(k)  plan by a minimum age policy. Data from BLS’s Current Population  Survey (CPS) show that of 3 million workers who graduated from high  school in 2015, about 30 percent were not enrolled in college by October  of that year. Recent high school graduates not enrolled in college are  about twice as likely to be employed or looking for work as those who are  enrolled. Young workers who do not attend college can expect less  wage growth over their career, making early savings all the more  important. Policies that prevent potential savings by young workers may  also disproportionately affect women, who often earn lower wages and  may benefit most from maximizing early savings. We have previously  reported that women have less retirement income on average than men,  partly because women are more likely than men to spend time outside the  workforce when they are older. This is a time when income may be higher  than earlier in their career and when they might otherwise be able to take  advantage of “catch-up” savings opportunities in their workplace plan. A  minimum-age policy may prevent some women from saving for retirement  when they are fully participating in the workforce, before they may reduce  work hours or leave the workforce to provide caregiving support to family  members. A minimum-age policy also has implications for low-wage  workers. Our projections suggest that the foregone savings of low-wage  workers from age 18 to 20 can be an even larger percentage of their  retirement savings than for higher earners because low-wage earners  may realize less growth in their salary over time, so later contributions do  less to make up for savings missed at a younger age. For example,  based on our analysis, compared to the loss of 5 percent of retirement  savings for a medium-level earner not saving from age 18 to 20, a lower- level earner with reduced wage growth over his or her career could lose  11.5 percent of retirement savings from not saving from age 18 to 20— more than twice the percentage lost by the medium-level earner with  average wage growth.

Minimum-age eligibility policies may mean foregone contributions  from an employer. The amount of foregone retirement savings due to  minimum-age policies can be higher when matching employer  contributions are considered. 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.  An employer’s match of employee contributions is typically, in effect, a 50  to 100 percent return on the employee’s contributions; participants who  receive an employer match can double the value of their contribution—a  100 percent return—if the employer makes a dollar for dollar match.

ERISA provides plan sponsors some flexibility to design plan policies that  can restrict workers’ eligibility to enroll and save in plans. ERISA  specifically permits sponsors to limit enrollment in 401(k) plans to workers  age 21 and older. Over 8 million workers under the age of 21 are  potentially subject to this policy. In passing ERISA, Congress supported  the policy goal of increasing access to plans by allowing workers to save  for retirement as early as possible. Increasing access to plans was also  a policy goal supported by Congress more recently in passing the  Pension Protection Act of 2006. The current minimum-age policy does  not further that goal. Extending eligibility to workers at an age earlier than  21 would also give young workers an opportunity to build their private  sector savings at the same time they are earning credits toward future  Social Security retirement benefits. In addition, increasing workers’  access to workplace retirement plans is a current federal policy goal,  reiterated by DOL guidance and recently in DOL’s fiscal year 2017  Budget Justification.

Employers may bear costs from enrolling additional workers in plans and  administering their accounts after they leave their employ, but our prior  work has shown that participants often bear the costs of administering  their accounts and plans can use forced-transfers to eliminate small  accounts left behind by separated employees. IRS officials told us that  the minimum-age policy is unnecessary because the minimum-service  eligibility policy permits plans to exclude short-term employees. By  extending eligibility to workers at an age earlier than 21, private  retirement plan coverage could expand for young workers who research  shows lack access to 401(k) plans. We recently reported that when  given the opportunity, young, low-income workers participate in workplace  plans at high rates.

Allowing young people to contribute at the beginning of their careers  would also help to mitigate the risk that potential unexpected events   could reduce the length of their careers and the period to save for  retirement and, thus, their retirement savings. For example, research  shows that many workers retire sooner than they expect, due to physical  limitations or the need to care for family members. Such individuals will  not save for retirement for as long as they had planned or during years in  which their contributions may have been highest. Extending eligibility to  workers at an age earlier than 21 could help a significant number of  workers to save at an earlier age and those who experience unforeseen  absences from the workforce or premature retirement will be better  positioned to maximize their retirement savings during their working  years.

section_title: 1-Year Minimum-Service Eligibility Policies Delay and May Prevent Plan Participation and Our Estimates Suggest they May Result in Lower Savings
paragraphs: Minimum-service eligibility policies of up to 1 year delay access to  workplace 401(k) plans and can reduce potential retirement savings for  workers of any age, according to our projections of retirement savings.  For example, our projections suggest that for a 30-year-old worker  earning a salary of $71,841 ($52,152 in 2016 dollars), a 1-year delay in  plan eligibility could mean $51,758 less in savings at retirement ($14,021  less in 2016 dollars). That amounts to 3 percent of the worker’s total  projected retirement savings from their own savings alone. Including the  employer match of 3 percent not received during the 1-year period of  ineligibility, the worker could have $81,055 less at retirement ($21,957 in  2016 dollars). A minimum-service eligibility policy also means that any  workers excluded from participating in a plan also will not receive any  employer contribution to which they might otherwise be eligible.

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. 6). (See Appendix II, Table 5 for a similar table with  values adjusted for inflation.) A longitudinal study by the BLS found that  the average number of jobs for individuals born in the latter years of the  baby boom was 11.7 jobs. The same study found that about half those  jobs were held between ages 18 and 24. 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), based on our projections.

Lastly, under the current definition of a “year of service,” some types of  workers are likely to remain ineligible to participate in their workplace  401(k) plan indefinitely. For example, long-term part-time workers can be  excluded from their employers’ plans regardless of tenure if they work  fewer than 1,000 hours during the year, or about 19 hours per week.  According to March 2016 data from the CPS, 14.3 million workers said  that they usually worked 20 or fewer hours per week over the previous  month. Those data also show that more women than men worked 20 or  fewer hours per week (making women more likely than men to be  ineligible for their workplace plan as a result of the 1,000 hour rule).  Even employees working more than 19 hours per week could be subject  to ineligibility due to the 1,000-hour rule, if they work multiple part-time  jobs. Moreover, under the current definition of a year of service, workers  who remain employed on a part-time basis year after year may not be  eligible to participate in their workplace savings plans.

In first establishing the rules for a minimum-service policy for plan  eligibility, ERISA capped such policies at 1 year of service, defined as  1,000 or more hours worked over 1 year. While plans can require fewer  hours or no hours of service for plan eligibility, they cannot require more  than 1,000 hours. However, millions of part-time workers may never  qualify for their employer’s plan with a 1,000-hour requirement. Some  members of Congress and the current administration have proposed  amending the law to ensure that long-term part-time workers can become  eligible to save in their employer’s workplace plan. As part of its fiscal  year 2017 budget submission, the current administration proposed  amending federal law to require plans to expand eligibility to workers who  have worked for their employer at least 500 hours per year for 3  consecutive years, allowing workers to contribute their own earnings, but  not necessarily to receive employer contributions to their account. A  2015 Senate Finance Committee bi-partisan working group endorsed this  proposal and legislation was introduced that incorporated it. Prior to the  current administration’s proposal, legislation was introduced that also  would have required plans to cover long-term part-time employees.

Given today’s workforce, determining whether the current definition of  “year of service” is consistent with the goal of expanding access to  workplace retirement savings plans would be beneficial to all workers.  Without revising the definition of “year of service”, minimum-service  eligibility policies may continue to reduce potential retirement savings for  millions of workers who will remain ineligible to participate in a plan  because their annual hours of service may fall below their plans’  requirement. Some retirement professionals we interviewed said that  operating without a 1,000 hour rule could result in more small accounts  left behind by short-term workers, but as we previously noted, forced  transfers of small balances can help plans manage any associated  burden or cost, and often those costs are borne by participants  themselves.

section_title: Our Projections Suggest that Current Employer Contribution Policies Can Also Reduce Workers’ Retirement Savings in 401(k) Plans
paragraphs: 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. Current law also permits 401(k)  plan sponsors to delay the accrual of employer matching contributions  until the end of the year. Information from our survey of 80 plan sponsors  and plan professionals showed that plan sponsors often use these two  requirements together. Based on our review of relevant statutes and  interviews with retirement professionals and government officials, we  found that these provisions were created decades ago when 401(k) plans  did not exist and when profit sharing contributions were the norm.  According to Treasury officials, the provisions met plan sponsors’ need to  wait until the end of the year to identify what their profits were for the year  and thus what the employer’s contribution would be for the year.  However, today most employer-based plans are 401(k) plans, not  traditional profit sharing plans, and based on our analysis of industry  survey data, most 401(k) plans make matching contributions, which are  based on participants’ contributions throughout the year. Although plan  sponsors may have previously found these two policies to be beneficial,  our projections suggest they may also potentially reduce workers’  retirement savings.
subsections: section_title: Last Day Policies Can Reduce Workers’ Retirement Savings, Based on Our Projections
paragraphs: 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.  Although last day policies can provide financial benefits to plan sponsors  and may also ease plan administration, these policies can reduce  potential retirement savings for workers. 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. For example, our projections suggest that for a 30-year-old  earning $71,841 ($52,152 in 2016 dollars), the employer contribution not  received due to an unmet “last day” policy is $2,155 in that year ($1,443  in 2016 dollars). But it could be worth $29,297 by retirement ($7,936 in  2016 dollars), which is 3 percent of the worker’s total projected savings  from employer contributions of $969,674 ($262,673 in 2016 dollars) at  retirement.

Our projections also suggest that a last day policy can reduce potential  retirement savings to the same extent as a 1-year minimum-service policy  for employer contributions, except the potential savings are lost in the last  year rather than in the first. Last day policies can reduce potential  retirement savings for even long-tenure, full-time workers who separate  from their employers before the official last day of the year. For example,  a 67-year-old employee who has worked for the same employer during  his or her entire career and retires when eligible for full Social Security  benefits could lose the employer’s $6,606 match for that last year ($1,837  in 2016 dollars) if it is before the end of the year. Moreover, the last day  policy can affect workers repeatedly throughout their careers. If our  hypothetical worker leaves three jobs without satisfying a last day  requirement, at ages 20, 30, and 40, the worker could lose a total of  $6,542, which could be worth $69,583 at retirement ($18,849 in 2016  dollars).

ERISA caps at 2 years the length of service that a plan sponsor can  require before a participant is eligible to receive employer contributions.  Given the mobility of the workforce, this provision ensures that workers  who change jobs are eligible, just like long-tenured workers, to benefit  from employer contributions for which employers receive a tax benefit.

Given that job turnover is greater among younger workers, ERISA’s cap  on a service policy that delays employer contributions also helps to  ensure that workers’ savings in these tax-advantaged accounts are not  excessively diminished at a time when, our projections suggest,  contributions have the greatest ability for compound earnings over time to  improve retirement savings. However, because a last day policy requires  an additional year of service to receive any employer contributions, year  after year, a worker who has already satisfied a 2-year minimum-service  policy would have to wait up to another year to receive an employer  contribution. (See Appendix II Table 8 for examples of how a last day  policy could potentially reduce retirement savings.)

IRS oversees provisions of federal law applicable to eligibility and vesting  and Treasury is responsible for developing proposals for legislative  change in these areas. However, according to an IRS official, the law  permits 401(k) plans to use a last day policy and, as long as the law’s  non-discrimination and coverage rules are satisfied, plans are generally  free to structure their plans as they choose. In addition, according to that  IRS official, the flexibility provided to plans by ERISA prevents IRS from  prohibiting plans’ use of a last day policy. Considering whether an  adjustment to the law’s provisions regarding plans’ use of a last day  policy is needed could help to ensure that 401(k) plan policies reflect the  current mobility and characteristics of today’s workforce.

section_title: ERISA Allows Employers to Delay Employer Contributions, Which Our Projections Suggest Also May Reduce Potential Savings
paragraphs: Plan policies that delay employer contributions so that they are paid at the  end of the year rather than being paid in tandem with employee  contributions throughout the year affect participants’ opportunities to earn  compound interest on investment returns on the employer’s contribution  to their account over the course of the year. Our projections suggest it  may also reduce participants’ potential retirement savings. In contrast,  regular employer contributions, such as those made bi-weekly, allow  participants to potentially profit from the investment of that money and the  reinvestment of those profits. Delayed employer contributions may  seem negligible at first, but, if left to compound over time, our projections  suggest that the return on that employer contribution can amount to  significant savings. Moreover, while the immediate value of savings lost in  a single year can be relatively small, the potential value of that lost  opportunity compounds year after year. For example, our projections  suggest that for a worker who remains with one employer throughout his  or her career, the delay of the employer’s contribution until the end of the  year, each year, could mean $35,636 less in total savings at retirement  ($9,653 in 2016 dollars) than if the employer’s contribution was made on  a per pay-period basis (bi-weekly), in concert with the worker’s own  contributions. That is about 3.7 percent of our hypothetical worker’s  total 401(k) retirement savings based on employer contributions alone.

ERISA establishes rules for the accrual of retirement benefits in  workplace retirement plans. Those rules permit flexibility as to when an  employer’s contributions go into—or accrue to—an individual’s retirement  account. ERISA permits plan sponsors to delay making the employer  contribution to participants’ accounts until as late as the end of the year or  the date when the plan’s tax return is filed, including extensions.  However, the law permitting delayed employer contributions is from a  time when profit sharing plans were the norm and plans typically waited  until the end of the year to calculate and distribute employer contributions.  Those plans predate 401(k) plans and the matching contributions that are  now commonplace. Treasury officials told us that, because plan sponsors  today generally make contributions that match a participant’s own  deferrals, delayed employer contributions are no longer necessary in  most defined contribution plans. In addition, delayed employer  contributions are inconsistent with the best practice of saving for  retirement as early as possible. While IRS has primary responsibility for  overseeing eligibility and vesting policies and Treasury is responsible for  developing proposals for legislative change in these areas, the provision  permitting delayed employer contributions can only be changed by statute  and not by either agency. Considering whether the law’s provisions  regarding the timing of matching employer contributions should be  adjusted could be an opportunity to help ensure the provisions reflect the  current mobility and characteristics of today’s workforce.

section_title: Vesting Policies That Our Projections Suggest May Affect Participants’ Retirement Savings when They Separate from a Job Have Not Been Recently Evaluated by Regulators
paragraphs: Our projections suggest that vesting policies can also reduce retirement  savings when participants leave their job and the vesting policy is not  satisfied in full. (See fig. 7.) 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).

Caps for vesting policies are set by federal law and, over time, have been  shortened to provide for faster vesting to make it easier for workers in a  mobile labor force to keep employers’ contributions and to more easily  build their savings for retirement. As noted earlier, Treasury is the  federal agency that would be responsible for developing proposals for  legislative change with regard to vesting. 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. Based on our survey of plan sponsors  and plan professionals, vesting policies are often used to reduce  employee turnover. In addition, according to retirement professionals we  interviewed, vesting policies reduce the direct cost of employer  contributions for shorter-tenure employees who do not stay long enough  to satisfy the vesting policy and keep employer contributions.  Nevertheless, current federal policies seek to improve retirement security  for today’s mobile workforce, including increasing the portability of  workplace retirement plan savings. However, our projections suggest  that current vesting policies can potentially reduce a participant’s  retirement savings when vesting requirements are not met in full. An  evaluation of the effects of current vesting policies on participants’  retirement savings may help to identify if those policies remain  appropriate for a mobile workforce increasingly dependent on their  employer-based retirement accounts, and help determine how vesting  policies affect the portability of retirement savings.

section_title: 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
paragraphs: 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. Responses to the survey show that  participants’ knowledge varied. (See table 7.) The accuracy of  responses was highest regarding the frequency of the employer’s  contribution, participants’ initial eligibility to join the plan and the types of  employer contributions made. However, based on our evaluation, some  participants surveyed lacked knowledge of their plans’ eligibility, employer  contribution, and vesting policies that, as our projections discussed earlier  suggest, can have important effects on retirement savings. Our survey  results may reflect some degree of unwarranted confidence by plan  participants regarding their understanding of plan policies. According to a  behavioral finance expert, about one-quarter of people generally  overestimate their understanding of finance-related terminology. An  individual’s lack of understanding of their employer’s policies can result in  suboptimal choices, such as choosing a job with a minimum-service  eligibility policy over one offering immediate eligibility, when wages,  working conditions, and other benefits are comparable.

Approximately two-thirds of respondents gave answers consistent with  the eligibility rules in place at their plan when they started their job, which  may reflect a fairly high level of education and long tenure among workers  we surveyed, but about a third of the participants we tested were  incorrect about their eligibility to join their employer’s 401(k) plan.

Among those not immediately eligible to join the plan and asked to  identify the reason for their initial ineligibility, more than half provided  incorrect answers. That result is generally consistent with a national  survey on self-reported financial literacy, which asked about 5,000 current  defined contribution plan participants to assess their own knowledge of  “eligibility requirements,” among other topics. That survey found that  while 85 percent felt they had a working knowledge of and understood the  term “eligibility requirements,” nearly half (46 percent) were not confident  enough in their understanding to teach others (see fig. 8).

Our survey results show that respondents had a good understanding of  their employer’s contribution. The high number of correct answers to the  question about how frequently employer contributions were made was  consistent with information we heard from a retirement expert we  interviewed who said that workers generally have a good understanding  of their employer’s matching contribution to their 401(k) plan account.  Workers who do not understand the significance of the timing of employer  contributions may not be well prepared to weigh such policies before  choosing to join or leave an employer. While more than half of  participants we surveyed were correct about whether they are required to  be employed on a specific day of the year to receive the employer’s  contribution, which could indicate a last day policy, more than a third (18)  did not know or did not answer the question. Understanding an  employer’s last day policy is important because, as our projections  suggest, the policy could potentially reduce retirement savings.

Lastly, understanding of vesting requirements was mixed. More than half  of participants gave accurate answers regarding their vesting status,  given their plans’ policies. Clearly written plan documents may also have  helped those participants who understood their vesting status. Federal  law requires that a plan’s summary plan description (SPD) be written in a  clear manner and uses a table to describe the maximum vesting schedule  for 2- to 6-year vesting, which some plans use as a model in their SPD. At  one of the companies where the majority of participants gave correct  responses, the plan documents clearly stated the plan’s 5-year graduated  vesting policy and the calculation of vesting status based on different  lengths of service by using a table (see fig. 9).

The national financial literacy survey found that respondents’ self- reported understanding was also high regarding the definition of a  “vesting period.” The survey found that about three-quarters of individuals  surveyed thought they had either a working knowledge of the term  “vesting period” or understood it well. However, not all participants we  surveyed understood their vesting status. Some respondents did not  know if their employer contribution was fully vested, did not attempt to  answer this question, or incorrectly believed that their employer  contribution was already fully vested, when it was not. Describing the  vesting policy that they had to meet or will have to meet to become  vested was also difficult for some participants. For example, one  participant we surveyed said that he was required to work for 5 years to  be fully vested even though the plan had a 6-year vesting schedule.

section_title: Unclear Plan Documents May Hinder Participants’ Understanding of Their Employers’ Eligibility and Vesting Policies
paragraphs: We found evidence that some eligibility and vesting policies in summary  plan descriptions (SPD) can be unclear. Our review of five SPDs found  that some eligibility and vesting policies were written using complex  technical language which may make them less likely to be easily  understood by the average plan participant. (See text box.) Participants  in two discussion groups comprised of plan sponsors and plan advisors  which we convened in March 2015 also said that plan participants  probably do not understand the eligibility and vesting requirements of  their plan because the SPDs use complex legal terms. Furthermore,  one retirement professional we interviewed said that employers’ own  difficulty understanding their plans’ eligibility and vesting policies  contributes to employees’ misunderstanding of these policies. According  to a retirement professional, errors in interpretation can occur, making the  clarity of plan documents more important.

Example of Complex Language in a 401(k) Summary Plan Description   You will become a Participant eligible to make Elective Deferral Contributions and  receive Safe Harbor Non-Elective Contributions and Profit Sharing Contributions on the  a) first day of the first month of the Plan Year or b) first day of the seventh month of the  Plan Year, coincident with or next following the date you attain age 21 and you complete  one (1) Year of Eligibility Service, provided that you are an Eligible Employee on that  date.

You have worked for your Employer four (4) years and have received Employer  Contributions of $1,000. You terminate employment and request a distribution of your  Employer’s Contributions. Because you have four (4) years of vesting service, you will  receive 60% or $600.

While this example illustrates what happens as contributions become  vested, it still cites what will be received rather than what could be lost.  Instead of informing a participant of what they will receive if they are not  fully vested when they leave their job, an employee may better  understand the financial consequences of the vesting policy if the  employer clearly informs them that they will lose a percentage of their  account balance if they leave before becoming fully vested. However,  according to a retirement professional we interviewed, employers seeking  to attract employees have an incentive to make the plan sound generous.

Plans can also include information in their SPDs about provisions that are  not used by the plan, a practice which is not explicitly prohibited by  ERISA, making it difficult for participants to know which contribution is  currently being offered and which eligibility and vesting policies apply.  One plan sponsor explained that this is a common practice because plans  want to avoid the time and expense of revising the plan documents later if  they decide, for example, to change the type of employer contribution.  One SPD we reviewed contained information about six employer  contributions when only one contribution was offered (see fig. 10). This  practice leaves participants with extraneous information and no clear way  to tell what policies apply to them without additional information from their  employer. Treasury officials said that it may be necessary for employers  to describe contributions that they are not currently offering to employees,  should they need to make these contributions at a later date in order to  pass the Internal Revenue Code nondiscrimination tests. However, those  officials agreed that the description of multiple employer contributions in  SPDs can be confusing to participants as they may not be able to  determine which contribution currently applies to them.

Employers can do more than the minimum required communication and  look for innovative and effective ways to improve participant  understanding of plan policies. Our survey of 80 plan sponsors found that  the highest number reported using new employee orientation and a  welcome packet (63 and 62, respectively) to communicate eligibility and  vesting policies to employees. One participant advocate we interviewed  suggested that discussing policies one-on-one is the best way to  communicate rules to employees, but said that approach is costly.  Another suggestion was to tailor plan information to participants. For  example, that participant advocate suggested that a plan notice  communicating eligibility policies could read: “as of (specific date), you  are eligible to participate in the plan (or to get an employer match).” The  advocate also suggested that communications could increase in  frequency ahead of the eligibility event, like a countdown, referring to  eligibility like a prize to build excitement. Specifically, messages such as,  “congratulations, you are now eligible…” can be effective in triggering  behavior, like enrollment in the plan. Several experts we interviewed  generally agreed that employers should simplify communications about  plan eligibility and vesting policies to increase employee understanding,  which could mean presenting information in a more concise, manageable  format. Figure 11 shows an example of a short summary of plan  highlights, which was provided by one plan service provider we  interviewed. The first page of the 2.5 page document summarizes the  plan’s basic rules for eligibility and vesting, does so using short  sentences, and does not require the reader to refer to other sections of  the document to fully understand the rules.

ERISA requires that summary plan descriptions (SPD) be written in a  manner that can be understood by the average plan participant and be  sufficiently comprehensive to inform participants of their rights and  obligations under the plan. In addition, SPDs must explain a plan’s  provisions with respect to eligibility and vesting, but plans have discretion  in how they present these provisions. Under ERISA, DOL is responsible  for enforcing requirements pertaining to the disclosure of companies’  retirement plan policies, including that plan policies should be  communicated clearly. To do this, DOL issues regulations, can make  judgments about the clarity of plan documents, and can issue guidance to  plans on how to best comply with the intent of the laws and regulations.  While its regulations restate the requirements in ERISA and list specific  policies that should be included in the plan description, the agency is not  more specific about what constitutes clear communication of policies and  what does not. Because ERISA and DOL’s regulations pertaining to  SPDs are not prescriptive about how plan sponsors can explain their  plans’ eligibility and vesting policies clearly, plan sponsors may provide  information in a way that meets the necessary requirements rather than in  a manner most likely to be clear and helpful to participants. DOL also has  a policy that it will not make determinations about the clarity of plan  documents. Agency officials told us that they have this policy because  determining whether specific wording is clear is highly subjective.  Currently, DOL has not issued guidance that identifies best practices for  communicating information on eligibility and vesting, which could assist  plan sponsors with improving the clarity of those policies in SPDs. By  providing guidance with best practices to help plan sponsors clearly and  accurately communicate eligibility and vesting requirements, DOL can  help ensure that workers better understand the information necessary to  make informed choices regarding their employment and savings  behavior. In addition, such guidance could include encouraging plans to  provide information only on contributions actually made by employers—a  best practice which could help participants better understand the plan  policies that affect them.

section_title: Conclusions
paragraphs: 401(k) plans were created four years after ERISA was passed in 1974.  Since that time, 401(k) plans have become the dominant employer- sponsored plan relied on by employees for retirement savings.  Understanding the eligibility and vesting policies used by these plans has  become increasingly important for workers, employers, and regulators.  However, some of these policies were created to address issues when  plans were more of a supplemental source of retirement income, in  addition to a traditional pension, and reliant only on non-matching  contributions from an employer rather than on a match of employee  contributions. As 401(k) plans become the primary, and often sole,  retirement savings vehicles for a large segment of the mobile workforce,  there is a growing need to consider the effects of eligibility and vesting  policies on workers, particularly those who are younger, less-educated,  and with lower incomes. Moreover, one of the reported advantages of  account-based plans like 401(k) plans is their enhanced portability over  traditional pensions. Yet current rules and plan sponsor practices suggest  some limitations on that portability, which can have potentially significant  effects on retirement security.

Workers who must meet minimum-age eligibility policies to begin  participating in a workplace plan miss out not only on contributing to  401(k) accounts, but also on the opportunity to receive employer  matching contributions, which can significantly increase the amount  contributed to their accounts. Saving early is particularly important for  those who join the workforce out of high school and may never pursue  higher education, with its associated higher wages. Our projections show  that the inability to save in a 401(k) plan from ages 18 to 21 can result in  tens of thousands of foregone retirement savings. While turnover among  young workers can create administrative costs for an employer, these  costs often are borne by participants in the form of fees. Extending plan  eligibility to allow otherwise eligible workers to at least save their own  contributions in their employers’ 401(k) plans at an age earlier than 21  could help young workers improve their retirement security by saving  through their workplace plan at a time when those savings have the most  to gain.

Minimum-service eligibility policies can also affect employees’ ability to  save for retirement. Re-examining the legal definition of “year of service”  used in minimum-service eligibility policies can help to ensure that the  rules are consistent with today’s mobile workforce and use of 401(k)  plans. Opening 401(k) plans to more workers could result in additional  small accounts, which are sometimes abandoned by their owner. But that  challenge can be mitigated in ways that do not reduce savings. At the  same time, opening 401(k) plans to more workers could help many who  now lack coverage to access a workplace retirement plan and make tax- deferred contributions toward their retirement security.

Last day policies can also affect employees’ retirement savings. Given  the mobility of today’s workforce, all workers are potentially affected by  these policies. Further, policies that allow employers to delay making  matching contributions to participants until the end of the year can also  result in foregone savings. This type of policy can affect not only  employees who separate from a job after a year or two, but also those  who spend their entire career with the same employer. The policy is a  remnant of the profit sharing plan era, when employers typically  calculated benefits at the end of the year. Few employers rely on profit  sharing contributions alone these days, so delayed employer  contributions may be unnecessary. Considering whether these provisions  should be adjusted could help ensure they reflect today’s mobile  workforce and use of matching contributions in 401(k) plans.

Vesting policies also present missed opportunities to improve savings for  workers who are mobile. Given that the median length of stay with a  private sector employer is currently about 4 years, the rule permitting a 6- year vesting policy may be outdated. Employees who forfeit employer  contributions to their account when they leave a job prior to the end of the  plan’s vesting period lose the opportunity to have those funds grow in the  plan or to transfer those contributions into their new employer’s plan,  reducing their retirement savings. A re-examination by Treasury of the  appropriateness of current maximum vesting policies could help  determine whether they unduly reduce the retirement savings of workers  who change jobs.

Finally, having clear and concise information about their retirement plan’s  eligibility and vesting policies helps employees make informed decisions  affecting their retirement savings. Guidance from DOL can help plan  sponsors better inform participants about the plan policies that they must  understand to make optimal decisions.

section_title: Matters for Congressional Consideration
paragraphs: To help increase plan participation and individuals’ retirement savings,  Congress should consider updating ERISA’s 401(k) plan eligibility  provisions to: extend plan eligibility to otherwise eligible workers at an age earlier amend the definition of “year of service,” given the prevalence of part- time workers in today’s workforce.

In addition, Congress may wish to consider whether ERISA’s provisions  related to last day policies and the timing of employer matching  contributions need to be adjusted to reflect today’s mobile workforce and  workplace plans, which are predominantly 401(k) plans offering matching  employer contributions.

section_title: Recommendations for Executive Action
paragraphs: To ensure that current vesting policies appropriately balance plans’ needs  and interests with the needs of workers to have employment mobility  while also saving for retirement, Treasury should evaluate the  appropriateness of existing maximum vesting policies for account-based  plans, considering today’s mobile labor force, and seek legislative action  to revise vesting schedules, if deemed necessary. The Department of  Labor could provide assistance with such an evaluation.

To help participants better understand eligibility and vesting policies, DOL  should develop guidance for plan sponsors that identifies best practices  for communicating information about eligibility and vesting policies in a  clear manner in summary plan descriptions. For example, DOL could  discourage plans from including in documents information about employer  contributions or other provisions that are not actually being used by the  plan sponsor.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of the Treasury and  Labor, and the Internal Revenue Service. Treasury provided technical  comments, including those of IRS, which we have incorporated where  appropriate, and oral comments, as discussed below. DOL provided  written comments, which are summarized below and reproduced in  Appendix III.

With respect to our recommendation that Treasury evaluate existing  maximum vesting policies, Treasury had no formal comment. As we detail  in our report on pages 44-46, given the effect that vesting policies can  have on the retirement savings of mobile workers, we believe that it would  be beneficial for Treasury to evaluate current vesting policies. Treasury  may be able to incorporate an evaluation of these policies into the  analysis it conducts in preparing the annual “Greenbook,” highlighted in  our report on page 12, and which accompanies the President’s annual  budget submission and outlines the President’s tax-related legislative  proposals. DOL, in its written comments, stated that substantive  provisions of Title I of ERISA governing eligibility and vesting provisions in  401(k) plans are under the interpretive and regulatory jurisdiction of the  Secretary of the Treasury. DOL also stated that Treasury and IRS  generally consult with DOL on subjects of joint interest and it expects they  will do so regarding our report.

With regard to our recommendation to develop guidance for plan  sponsors that identifies best practices for communicating information  about eligibility and vesting policies in a clear manner in summary plan  descriptions, DOL agreed that disclosures explaining these policies are  important to participants’ ability to make informed choices about  retirement savings. DOL also stated that under current law and  regulations, this information must be written in a manner that can be  understood by the average participant. DOL described planned actions  that GAO believes are consistent with the intent of our recommendation.  For example, DOL noted that an evaluation of best practices regarding  eligibility and vesting should consider other disclosures provided to plan  participants. DOL highlighted a long-term project on its current regulatory  agenda relating to individual benefit statements, another type of  disclosure provided to participants. DOL said that additional input from a  broader range of plan sponsors and plan fiduciaries, possibly obtained  through a Request for Information published in the Federal Register,  could supplement the information we highlight in our report on pages 52- 58 and contribute to an informed development of best practices guidance.

DOL stated that it did not agree that implementing the recommendation  allows the best use of its limited resources. DOL stated it would not be  appropriate at this time to reallocate resources away from its existing  priority projects to a new best practices project focused on our  recommendation, especially given the regulatory requirements that  currently apply to summary plan discrimination disclosures on eligibility  and vesting. However, DOL stated it would review its existing outreach  materials on plan administration and compliance for opportunities to  highlight the issues we raised in our report, as well as consider our  recommendation in the ongoing development and prioritization of its  agenda for regulations and sub-regulatory guidance. We agree with DOL  that the efforts it plans to take in response to our recommendation, if fully  implemented, will meet the intent of the recommendation and help plan  sponsors more clearly communicate eligibility and vesting policies to plan  participants without developing guidance.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretaries of Labor  and the Treasury, the Commissioner of Internal Revenue, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
subsections: section_title: Overview of Objectives, Scope, and Methodology
paragraphs: 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 did not  examine the use of these policies by defined benefit plans or by public  retirement plans.

We reviewed survey data, industry data, and conducted interviews to  determine what is known about the prevalence of eligibility and vesting  policies and why plans use them. To identify what is known about the  prevalence of eligibility and vesting policies, we conducted a non- generalizable survey of plan sponsors and plan professionals with plans  ranging in size from less than 100 participants to more than 5,000. We  received 80 responses to this survey. We also reviewed nongeneralizable  data from Plan Sponsor Council of America’s (PSCA) annual survey of  defined contribution plans, which covered 613 plans with 8 million  participants and $832 billion in plan assets. PSCA’s dataset represents  plans of varying sizes and industries, but includes a greater proportion of  large plans based on participant numbers and assets and  disproportionately represents the financial, insurance, and real estate  industries when compared to the total population of plans, as measured  by 2013 Form 5500 filings. In addition, we reviewed non-generalizable  data from Vanguard’s 2015 report on the 1,900 qualified plans for which it  serves as record keeper. These two were the only datasets we identified  with detailed information on eligibility and vesting policies. We evaluated  another large dataset and determined that it was not reliable enough for  our purposes. We also analyzed generalizable Census Bureau survey  data to identify which eligibility policies affect workers, as reported by the  workers themselves.

To assess the reliability of these data, we interviewed staff from Vanguard  and the Census Bureau who are responsible for producing the data. We  also reviewed documentation related to these data sources, such as  descriptions of their methodology. We also performed various tests on the  data. For the PSCA data, we compared selected data from PSCA’s 2013  survey—the survey we used—to data from PSCA’s 2012 survey to  assess the consistency of the data. Specifically, we reviewed basic  survey respondent demographic data (respondents by plan type, amount  of plan assets, and industry) and key data on eligibility and vesting (the  percentage of plans with service restrictions for plan eligibility, the  percentage of plans with age restrictions for plan eligibility, and the  percentage of plans that have vesting policies that require a service  period for the vesting of matching employer contributions). We also  evaluated the makeup of the plans included in PSCA’s survey by  comparing selected demographic data from PSCA’s survey to  Department of Labor Form 5500 plan demographic data. For the  Vanguard data, we asked a Vanguard official who is responsible for the  data questions about the scope of the data, how the data are collected  and maintained, and whether they have any limitations. We also  compared the eligibility and vesting data to the data from PSCA’s survey  and our own survey of plan sponsors. For the Census Bureau data, we  performed electronic testing for missing data, outliers, and obvious errors.  Based on these steps, we determined that the PSCA, Vanguard, and  Census Bureau data were sufficiently reliable for our purposes. We also  interviewed government officials from the Securities and Exchange  Commission, the Internal Revenue Service, and the Department of Labor,  as well as retirement professionals, to determine whether they were  aware of any data sources regarding the prevalence of eligibility and  vesting policies and to obtain their perspectives on the policies’  prevalence. See “Selection and Categorization of Interviewees” later in  this section for more information on our interviews.

To determine why plans use eligibility and vesting policies, we surveyed  plan sponsors and plan professionals by including a link to our survey in  four industry publications (80 responded). The questions asked  respondents to identify and rank the importance of multiple factors in their  decision to use specific eligibility and vesting policies. To supplement our  survey, we interviewed government officials, retirement professionals,  and academic researchers to obtain their perspectives on why plans use  eligibility and vesting policies. For additional context and perspectives, we  also held two structured group interviews at a regional defined  contribution plan conference with an open invitation to plan sponsors and  plan service providers to discuss the reasons why plans use these  policies.

To examine the policies’ potential effects on retirement savings over time,  we developed hypothetical scenarios to illustrate what the effect could be  for an individual based on a number of assumptions. For the hypothetical  projections, we made a number of assumptions regarding salary levels,  employee deferrals, employer matches, and investment returns drawn  from federal and industry data sources, including Bureau of Labor  Statistics data, PSCA’s annual defined contribution plan sponsor survey  on plan policies used, and the Social Security Trustees’ report (2015  Trustees Report, long range projections, intermediate assumptions). (See  Appendix II for a detailed explanation of the assumptions used and  additional tables providing more projections for comparison as well as  inflation-adjusted values.) 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.

To assess participants’ understanding of eligibility and vesting policies,  we used data from the National Association of Retirement Plan  Participants’ (NARPP) Participant Survey: Study of Financial  Empowerment Literacy and Trust (FELT survey) to identify participants’  understanding of financial terms, and generalizable data from a Defined  Contribution Plan 2015 Study of Participant Satisfaction and Loyalty  (DCP) to identify the decisions that participants would make about their  employment based on their understanding of their companies’ 401(k)  policies. NARPP’s FELT surveys approximately 5,000 current 401(k) and  403(b) participants yearly, and was administered in April 2015. To assist  us with our work, NARPP agreed to include the terms “eligibility  requirement” and “vesting period” to the list of terms already included in  their financial literacy survey. The DCP surveys an internet panel of over  5,000 respondents and was administered during the month of April 2015.  NARPP provided the surveys’ summary responses to us for our analysis.  To assess the reliability of the data from the DCP and FELT surveys, we  interviewed an official from Boston Research Technologies who is  responsible for managing the two surveys. We also independently  conducted manual tests of the DCP survey data and compared selected  survey responses to similar data from other samples of defined  contribution plan participants. We found the data to be sufficiently reliable  for our purposes. We did not perform separate tests on the FELT survey,  which uses the same sampling frame and procedures as the DCP survey.

We further assessed participants’ understanding of eligibility and vesting  policies by administering a questionnaire to individuals testing their  knowledge of the eligibility and vesting policies used by their 401(k) plans  and comparing their answers to the actual policies in their plans’  summary plan descriptions (SPD), summaries of material modification,  and exchanges with plan administrators . This allowed us to determine  the accuracy of their knowledge rather than rely on their self-reported  knowledge. We analyzed the accuracy of the 46 responses by reviewing  plan documents provided by the sponsors or their service providers and  emailed the sponsors directly to confirm that we understood the plan  policies correctly, as necessary. See Survey Data Sources below for  details on the survey design and implementation. To further assess the  clarity of plans’ eligibility and vesting policies, we reviewed the SPDs of  five companies, including those we surveyed regarding participant  understanding. One SPD was provided by a third-party plan administrator  who we interviewed. Additionally, we conducted online searches for  relevant literature and asked interviewees to advise us regarding relevant  studies and papers. We then assessed the relevance of the studies to our  research questions to include those findings, as appropriate. Also, to  understand what sources of information on eligibility and vesting policies  participants typically have, we held two discussion groups with plan  sponsors and plan advisors and asked them to identify the methods plans  use to communicate their policies. Results of our review of the SPDs and  discussion groups are not generalizable, but provide additional context  and perspective. Finally, we interviewed retirement professionals and  academic researchers, as discussed below, to get their perspectives on  participants’ understanding of eligibility and vesting policies and to invite  their suggestions on how this information can be more effectively  presented to improve participant understanding. For example, we spoke  to several financial literacy experts who made observations about  financial decision making more generally and what that could tell us about  eligibility and vesting policies specifically.

section_title: Survey Data Sources
subsections: section_title: Plan Sponsor and Plan Professional Questionnaire
paragraphs: Design and implementation. We developed a web-based questionnaire  for plan sponsors and plan professionals to collect information on  eligibility and vesting policies. The questionnaire included questions on  the types of eligibility and vesting policies plans use and the reasons they  use these policies. In addition, the questionnaire included questions on  the timing of employer contributions, including whether plan participants  have to be employed on the last day of the year to receive employer  contributions and the schedule for making employer contributions.  Throughout the questionnaire, our questions focused on employer  contributions and did not distinguish between matching and non-matching  contributions. To inform our understanding of participants’ understanding  of eligibility and vesting policies, the questionnaire also included  questions regarding their views on the degree to which participants  understand these policies and how they are informed of the policies.

To minimize errors arising from differences in how questions might be  interpreted and to reduce variability in responses that should be  qualitatively the same, we conducted pretests with three individuals  external to GAO. The individuals included: an academic researcher, a  retirement professional, and a benefits coordinator for a manufacturing  company. Further, two GAO staff with expertise in the retirement area  and two staff with expertise in survey design reviewed the survey for  content and consistency. Based on feedback from these pretests, we  revised the questionnaire in order to improve question clarity. For  instance, in response to the benefits coordinator’s suggestion to clarify  the language used in a question focused on whether certain types of  employees are excluded from the plan, we modified the question to clarify  that we were asking whether employees in certain job classifications are  excluded from the plan.

After completing the pretests, we administered the survey. Starting in May  2015, we asked three industry groups to announce – through their  publications – an invitation for plan sponsors to complete our survey.  These groups included a link to our survey in their publications. Those  publications were: an email newsletter published by PLANSPONSOR,  Plan Sponsor Council of America’s annual survey of plans, and Pensions  & Investments’ Plan Sponsor Digest and Pensions & Investments Daily,  which are two publications directed at plan sponsors. We also included a  link to the survey in an online forum for American Society of Pension  Professionals and Actuaries (ASPPA) members who are owners or  senior managers of plan administration firms. We directly received  responses through August 31, 2015. We received 80 completed surveys.  We cannot report a response rate as it is possible that respondents  submitted multiple surveys or individuals responded who were not plan  sponsors. Sponsors and plan professionals could respond anonymously,  and some respondents did not provide contact information.

Analysis of responses and data quality. We used standard descriptive  statistics to analyze responses to the questionnaire. Because this was not  a sample survey, there are no sampling errors. To minimize other types of  errors, commonly referred to as non-sampling errors, and to enhance  data quality, we employed recognized survey design practices in the  development of the questionnaire and in the collection, processing, and  analysis of the survey data. For instance, as previously mentioned, we  pretested and reviewed the questionnaire with individuals internal and  external to GAO to enhance the clarity of our questions, which minimizes  the likelihood of errors arising from differences in how questions might be  interpreted and helps to reduce the variability in responses that should be  qualitatively the same. To help reduce nonresponse, another source of  non-sampling error, we asked the industry groups that publicized the  survey to re-publicize it to further encourage respondents to complete the  survey. In reviewing the survey data, we performed automated checks to  identify inappropriate answers. We further reviewed the data for missing  or ambiguous responses and followed up with respondents when  necessary to clarify their responses. On the basis of our application of  recognized survey design practices and follow-up procedures, we  determined that the data were of sufficient quality for our purposes.

section_title: Plan Participant Questionnaire
paragraphs: Design and implementation. We developed a web-based questionnaire  directed at plan participants to collect information on their understanding  of their companies’ 401(k) eligibility and vesting policies. The  questionnaire included questions about the individual’s own eligibility and  vesting status. In addition, the questionnaire included questions on the  timing of employer contributions, including whether plan participants have  to be employed on the last day of the year to receive employer  contributions. The participants’ responses and our analysis of their  accuracy are not generalizable.

To minimize errors arising from differences in how questions might be  interpreted and to reduce variability in responses that should be  qualitatively the same, we conducted pretests with two subject matter  experts and conducted pretests with three plan participants from external  companies. We also reviewed the survey with internal survey experts.  Based on feedback from these pretests, we revised the questionnaire to  improve question clarity. After completing the pretests, we administered  the survey using an online platform. To identify participants to test, we  first invited every plan sponsor who had provided contact information to  us when completing a separate plan sponsor survey to distribute a  separate questionnaire to their plan participants. Four plans agreed to  distribute a hyperlink to our participant questionnaire. We sent a link to  the survey to the participating sponsors and asked them to disseminate  the link and invite their plan participants to complete the questionnaire.  Starting on December 8, 2015, we made the survey available for the  participants to complete. While we asked the plans to send periodic  reminders, we did not have direct access to the participant groups and we  were not included on those communications. We did not select the  participants in any way or have input into who responded to the survey.  The survey closed on January 27, 2016. We received 50 completed  questionnaires and analyzed 46 of them. In the process of comparing the  survey responses to the plan descriptions, we manually reviewed each  survey response for outliers or errors in skip patterns. We excluded two  surveys because the respondents had no 401(k) account but said they  were eligible so they were not asked any further substantive questions.  Two others were excluded because they began employment on a date  before which we had a record of plan policies, so we could not analyze  the accuracy of their responses. Some respondents did not click the  “completed” button at the end of the survey and were not included in our  analysis. We cannot report a response rate as it is possible that  respondents submitted multiple surveys. In addition, most respondents  did not provide contact information. Evaluating the accuracy of participant  responses was the purpose of this survey, so our findings in that regard  are an assessment of data quality.

Analysis of participant responses and data quality. To describe what  is known about participants’ understanding of their companies’ 401(k)  plan eligibility and vesting requirements, we reviewed participant  responses at the four companies we surveyed. We compared the  employee responses regarding the eligibility and vesting requirements  that applied to them when they began working to information in the  respective summary plan description (SPD), and obtained clarification  from plan officials, as needed. Plans may issue new plan documents and  change policies over time, so to test individuals’ knowledge of the  eligibility policies that affected them when they were hired, we used the  policies in place at that time rather than the eligibility policies in place  most recently, when they differed. For example, to determine the  employee’s eligibility to join the plan, we identified the employee’s start  date and determined if there were any factors that would have prevented  them from immediately enrolling in the plan. In cases where we did not  have the plan document for the year the participant was hired, we  reviewed the plan document published before and after their hire date  and reviewed summaries of material modifications. If the information  about the plan policies in the two plan documents from before and after  their date of hire were the same, we used it to determine the accuracy of  the participant’s answer. However, when we could not determine the plan  policy for the relevant time period, we excluded the participant response  from our analysis of that question. For policy questions regarding current  plan policies (like frequency of employer contributions, and if the  participant is required to work on a particular day to receive employer  contributions) we used the current plan policy to determine the accuracy  of responses. We reviewed the plan details to identify information about  the vesting schedule. Three of the four companies we surveyed currently  offer automatic enrollment to eligible workers. Automatic enrollment is a  plan feature by which eligible workers are enrolled in the plan by default  and can opt-out if they do not wish to participate in the plan.

section_title: Survey of Income and Program Participation (SIPP)
paragraphs: Administered by the Census Bureau, the SIPP is a household-based  survey designed as a continuous series of national panels. The Census  Bureau uses a two-stage stratified design to produce a nationally  representative panel of respondents who are interviewed over a period of  approximately 3 to 4 years. Within a SIPP panel, the entire sample is  interviewed at various intervals called waves (from 1983 through 2013,  generally 4-month intervals). In addition to income and public program  participation, the SIPP includes data on other factors of economic well- being, demographics, and household characteristics. We used data from  the most recent relevant data set, the 2008 SIPP.

section_title: Plan Sponsor Council of America’s (PSCA) 57th Annual Survey of Plans
paragraphs: PSCA’s survey, which includes data for plan year 2013, covers a total of  613 profit sharing, 401(k), and combination 401(k)/profit sharing plans.  Only 2 percent of plans included in the survey are profit sharing plans and  therefore we determined the data are sufficiently representative of the  401(k) plan experience. PSCA, established in 1947, is a national, non- profit trade association of 1,200 companies and over six million plan  participants. PSCA has conducted an annual survey of plans for nearly 60  years.

section_title: Selection and Categorization of Interviewees
paragraphs: As part of our approach for obtaining information on why plans use  eligibility and vesting policies and participant understanding of these  policies, we interviewed government officials and a total of 21 retirement  professionals and academic researchers. We identified interviewees  based on our prior work examining 401(k) plans and recommendations  from initial interviewees. We selected interviewees who reflect a range of  perspectives, from those with a focus on plan participants to those with a  focus on plan sponsors. We selected federal government officials with a  role in overseeing eligibility and vesting policies: officials of the  Department of Labor, the Department of the Treasury, and the Internal  Revenue Service. We also interviewed an official from the Securities and  Exchange Commission, an agency that has a role in regulating the  investment options into which plan participants direct their contributions.  We categorized interviewees as retirement professionals if they provide  retirement plan-related services (such as those who serve as consultants  to plans), represent the interests of retirement plans or plan participants,  or otherwise perform work in the retirement area. We categorized  interviewees as academic researchers if they teach at an institution of  higher education and focus on conducting scholarly research relevant to  the retirement area. The views of those interviewed are not generalizable.

section_title: Appendix II: Explanation of Hypothetical Scenarios and Projected Retirement Savings
subsections: section_title: Explanation of Assumptions Used
paragraphs: Employee salary and retirement age. We assume that the worker starts  working at age 18 in 2016, and is continuously employed through  retirement at age 67 in 2065. We modeled lifetime earnings using  medium scaled earnings factors developed by the Social Security  Administration’s Office of the Chief Actuary (OCACT) (see table 8).  These factors express hypothetical earnings at each age as a percent of  the Social Security Administration’s national average wage index. The  scaled factors are based on average work and earnings of actual insured  workers over their careers. This approach has the advantage of reflecting  actual earnings histories, with steeper wage growth earlier in early- and  mid-career work years, and flatter wage growth in late-career work years.  Nominal wage increases an average of 5.6 percent per year. However,  this approach does not reflect the possibility that less-skilled workers and  lower earners may have flatter wage growth over their lifetime than  higher-skilled workers. For this reason, we ran an alternative scenario for  low earners featuring a constant nominal wage growth of 4.6 percent (see  table 9). This alternative scenario demonstrates that the loss of early  savings has a bigger effect on total savings at retirement for workers with  flatter earnings growth than for workers with steeper earnings growth. We  assume a retirement in 2065 at age of 67 because that is the Social  Security full retirement age for workers starting their careers in 2016.

Inflation. To report adjusted salaries and other figures we indexed to  2016 dollars using the Consumer Price Index for Urban Wage Earners  and Clerical Workers (CPI-W) projected under intermediate assumptions  from the 2015 Old-Age, Survivors, and Disability Insurance (OASDI)  Trustee’s report.

Employee deferrals. We assume that the individual in our hypothetical  projections makes contributions continuously through their continuous  employment from age 18 to 66, except where contributions are  suspended to illustrate the effect of an eligibility policy. PSCA survey data  from the 2013 plan year show that the average pre-tax salary deferral by  participants was 5.3 percent for non-highly compensated employees. We  referred to data from the 2013 plan year in PSCA’s report summarizing  results of its annual survey of 401(k) and profit sharing plans. Plans  reported on policies for the 2013 plan year. The survey includes 613  defined contribution plans with 8 million participants representing a wide  range of industries and plan sizes. The plans surveyed are 252 401(k)  plans, 13 profit sharing plans, and 348 combination 401(k)/profit sharing  plans. As noted in Appendix I, the PSCA population for 2013 includes a  greater proportion of large plans based on participant numbers and  assets and disproportionately represents the financial, insurance, and real  estate industries when compared to the total population of plans, as  measured by 2013 Form 5500 filings. The finance/insurance/real estate  industry was the predominant industry reflected in the PSCA data (36  percent of plans were in this industry), while over half of the plans  included in the Form 5500 filings (53 percent) represented the services  industry.

Employer matching contributions. We assume that the individual in our  hypothetical projections receives employer contributions through their  continuous employment from age 18 to 66, except where employer  contributions are delayed or forfeited to illustrate the effect of an eligibility  or vesting policy. We again referred to the PSCA survey data from the  2013 plan year. The average employer contribution among 401(k) plans  is 2.90 percent, which we rounded to 3 percent for our hypothetical  calculations. Similarly, the most commonly used match formula is 50  percent of employee deferrals up to 6 percent of salary (a max of 3  percent) used by 26.2 percent of plans. The next most common levels of  employer contribution are a 100 percent match up to 4 percent of  employee pay and a 100 percent employer match up to 5 percent, used  by 10.9 percent and 9.9 percent of plans, respectively. The hypothetical  projected amounts of retirement savings from employer contributions that  is foregone from delayed eligibility and forfeited contributions from unmet  vesting policies could be even larger if one assumed a higher, though not  uncommon, level of employer matching contributions. We also assume  that employer contributions are made on a per-pay-period basis, unless  calculated otherwise for comparison.

Returns. To set an annual return for each of the years of the worker’s  career for our hypothetical scenarios we formulated a composite return  based on Social Security Trustee projections. For the fixed income  portion of the return, we used the Social Security Trustees’ projected  annual trust fund real interest rate of 2.90 percent, and the projected  consumer-price index for urban wage earners and clerical workers (CPI- W) of 2.70 percent, both published in the 2015 OASDI Trustee’s Report  intermediate long range economic assumptions, for a nominal interest  rate of 5.6 percent. For the equity portion of the return, we added an  estimated long-term equity risk premium of 3.5 percentage points to the  annual trust fund nominal interest rate, for a nominal rate of return on  stocks of 9.1 percent. We changed the ratio slightly each year to reduce  equities exposure and investment risk as the worker approaches  retirement. The ratio corresponds to a “100 minus age” rule, which means  that the percentage of assets invested in equities is set at 100 minus the  worker’s current age. For example, when the worker is 50 years old, we  assume that just half of their assets are invested in equities and assign  the nominal return on stocks to just 50 percent of their retirement savings,  while the remaining portion is calculated to earn the nominal interest rate  on bonds. The “100 minus age” rule for portfolio diversification is relatively  conservative, thus the projected value at retirement that we report is less  than it would be if we had assumed a rule using a higher equities  allocation. For example, another rule used for portfolio diversification is  “120 minus age,” which would mean a higher equities allocation and  higher projected returns, because over time equities tend to produce a  higher average annual return than corporate bonds. A lower return  assumption would result in lower projected savings lost or forfeited from  the policies discussed in this report.

Leakage and fees. We assumed no leakage from the worker’s account  over time and did not apply any plan fees to the account balance. Both of  these factors could decrease the rate of the account balance’s growth  over time.

section_title: Appendix III: Comments from the Department of Labor

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tamara Cross (Assistant  Director), Angie Jacobs (Analyst in Charge), Sherwin Chapman,  Katherine D. Morris, Rhiannon Patterson, and Stacy Spence made  significant contributions to this report. Additional support was provided by  Jessica Artis, Deborah Bland, Julianne Cutts, Laura Hoffrey, Saida  Hussain, Gene Kuehneman, Jill Lacey, Sheila McCoy, Mimi Nguyen, Dae  Park, Joe Silvestri, Frank Todisco, Walter Vance, Kate Van Gelder, Adam  Wendel, Jill Yost, and Chris Zbrozek.

section_title: Related GAO Products
paragraphs: Retirement Security: Federal Action Could Help State Efforts to Expand  Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10,  2015.

Retirement Security: Most Households Approaching Retirement Have  Low Savings. GAO-15-419. Washington, D.C.: May 12, 2015.  401(k) Plans: Greater Protections Needed for Forced Transfers and  Inactive Accounts. GAO-15-73. Washington, D.C.: November 21, 2014.

Private Pensions: Pension Tax Incentives Update. GAO-14-334R.  Washington, D.C.: March 20, 2014.

Retirement Security: Women Still Face Challenges. GAO-12-699.  Washington, D.C.: July 19, 2012.  401(K) Plans: Increased Educational Outreach and Broader Oversight  May Help Reduce Plan Fees. GAO-12-325. Washington, D.C.: April 24,  2012.

Private Pensions: Some Key Features Lead to an Uneven Distribution of  Benefits. GAO-11-333. Washington, D.C.: March 30, 2011.

Private Pensions: Low Defined Contribution Plan Savings May Pose  Challenges to Retirement Security, Especially for Many Low-Income  Workers. GAO-08-8. Washington, D.C.: November 29, 2007.

Private Pensions: Changes Needed to Provide 401(k) Plan Participants  and the Department of Labor Better Information on Fees. GAO-07-21.  Washington, D.C.: November 16, 2006.


Question-summary annotations: questions: question: What did GAO find out about the effects on many 401(k) plans on workers’ abilities?
answer: 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).
child_questions: question: What did thirty-three of the plans surveyed prohibit?
answer: Thirty-three of 80 plans surveyed had policies that did not allow workers younger than age 21 to participate in the plan.

question: What do many plans require before employer contributions to employees' accounts are vested?
answer: Fifty-seven plans had vesting policies requiring employees to work for a certain period of time before employer contributions to their accounts are vested.

question: What are the primary reasons these plans have these policies?
answer: Plan sponsors and plan professionals GAO surveyed identified lowering costs and reducing employee turnover as the primary reasons that plans use these policies.

questions: question: What does federal law permit 401(k) plan sponsors to require?
answer: 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.
child_questions: question: What are today’s sponsors more likely to provide?
answer: 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.

question: What do GAO projections for hypothetical scenarios suggest?
answer: 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).
child_questions: question: How else could savings be reduced for today's mobile workforce?
answer: 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).

question: What have workers relied less on over time?
answer: However, over time workers have come to rely less on traditional pensions and more on their 401(k) plan savings for retirement security.

question: What is the Department of Treasury responsible for?
answer: 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.

question: What does saving early for retirement allow workers to benefit from?
answer: 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.

question: How may vesting policies reduce retirement savings?
answer: 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).
child_questions: question: What would a re-evaluation of vesting caps accomplish?
answer: 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.

questions: question: What does ERISA enable sponsors to do?
answer: 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.

question: What was GAO asked to do?
answer: GAO was asked to examine 401(k) plans' use of these policies.
child_questions: question: What does this report examine?
answer: 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.

questions: question: What does GAO suggest?
answer: 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.

question: What recommendation did GAO make to the treasury?
answer: 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.
child_questions: question: How did Treasury respond to this recommendation?
answer: Treasury had no comment on the recommendation.

question: Why does GAO believe that evaluations on vesting policies would be beneficial?
answer: GAO believes that such an evaluation would be beneficial, given the potential for vesting policies to reduce retirement savings.