Many employers provide their workers with access to a retirement savings plan. In fact, the U.S. Census Bureau estimated that there were 42.2 million full-time, full-year wage and salary workers ages 21‒64 participating in an employment-based retirement plan last year. An even larger number of workers have access to such plans and there is no doubt that these savings vehicles can help Americans better prepare for a financially secure retirement. However, a new study by the U.S. Government Accountability Office (GAO) argues that there is some room for improvement in the way that certain retirement plans are designed, particularly with how sponsors can use age and tenure requirements to restrict plan eligibility. Specifically, current law permits 401(k) plans to require a minimum age of 21 and at least 1,000 hours of service over one year of tenure with an employer before a worker is deemed eligible to join.
These policies can help plan sponsors reduce the costs and administrative hassles that may arise when workers enroll in a plan but then part from the company after only a short while and leave behind small accounts. To help reduce employee turnover, restrictions are also permitted for when workers become eligible for company matching funds and when they can access all of these contributions. Not all employers implement such policies but the GAO study argues that these rules are outdated for the modern, more mobile workforce, and that the effects can wind up reducing the amount of retirement savings a person can amass over his or her working career. For example, men and women workers have historically held around eleven jobs on average between the ages 18 to 48, according to Bureau of Labor Statistics (BLS) data.
The GAO researchers estimate that being ineligible to save in a new employer’s plan for one year on eleven occasions could result in $411,439 less retirement savings ($111,454 in 2016 dollars). Similarly, the study estimates that an 18-year-old worker having to wait just until age 21 to join a 401(k) plan could reduce their total lifetime savings by as much as $134,456 ($36,422 in 2016 dollars). Many other examples, with numerous assumptions, are given in the study to further highlight the potential costs of common eligibility and vesting policies. The authors also make a handful of recommendations for how the government can update the rules governing 401(k) plans but it remains uncertain whether such “improvements” will be pursued by either the current or incoming administrations.
Regardless of what ultimately happens in Washington, it appears that workers are already aware of how eligibility policies can influence their retirement saving. A recent Natixis study, for instance, found that more than eight in ten surveyed U.S. workers believe they could save more for retirement if they were able to access their company’s plan on the first day of employment. There is also wide support for government influence in more general retirement matters, e.g. another eight in ten respondents believe there should be a mandate requiring employers to offer workplace retirement savings plans, and three-quarters of surveyed workers even feel there should be a mandate requiring employer matching contributions. Such sentiment cannot go ignored by employers and it only adds to the importance of benefits offerings for companies that want to stay competitive in a tightening labor market.
Sources: EBRI, GAO, NAPA, Bloomberg, Natixis Global Asset ManagementPost author: Charles Couch