Vesting doesn’t help with retention

Ary Rosenbaum - The Rosenbaum Law Firm P.C.
Contact

Ary Rosenbaum - The Rosenbaum Law Firm P.C.

I have worked at places that were so unpleasant that I consider myself lucky the vesting schedule was only six years. If they had the option, I’m convinced they would have implemented a 20-year vesting schedule. For me, vesting schedules have never been a reason to stay at a job. Recent research from Vanguard reveals that vesting schedules are ineffective at promoting employee retention.

According to the Internal Revenue Code, defined contribution plans must either immediately vest employer contributions at a rate of 100% or utilize a cliff or graded vesting schedule. A cliff vesting schedule allows employees to become fully vested in their employer contributions after a specific period—usually within three years of eligibility. Conversely, a graded vesting schedule gradually vests employees over six years. These represent the maximum requirements, so plans can actually offer more generous cliff and graded schedules than mandated.

Data from Vanguard in 2024 indicates that 49% of retirement plans feature a full and immediate vesting schedule, while the remaining plans apply either graded or cliff vesting with various service requirements. The most common alternatives include a five-year graded schedule, used by 16% of plans, and a three-year cliff schedule, used by 9% of plans. To assess the cost savings for employers resulting from forfeitures, Vanguard analyzed 4.7 million job separations across 1,500 of its administered plans from 2010 to 2022. Their review indicated that the cost savings were generally modest. Vanguard concluded that vesting does not provide a systematic benefit for employee retention, recouping only about 2.5% of employer contributions for the average plan. One reason for the minimal impact on retention is that many 401(k) participants may be unaware of their plan’s vesting requirements. A recent survey of current participants in Vanguard-administered plans revealed that only one-third (33%) correctly identified whether their plan had a vesting schedule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© Ary Rosenbaum - The Rosenbaum Law Firm P.C.

Written by:

Ary Rosenbaum - The Rosenbaum Law Firm P.C.
Contact
more
less

PUBLISH YOUR CONTENT ON JD SUPRA NOW

  • Increased visibility
  • Actionable analytics
  • Ongoing guidance

Ary Rosenbaum - The Rosenbaum Law Firm P.C. on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide