Saturday, July 09, 2022

Looking Before You 'Leap'

As new rules about rollover disclosures kick in, a new report highlights an often unacknowledged risk of rollovers—high(er) fees.

That’s right—a new report from Pew Trusts seems to have stirred up a new awareness of that issue—all this attention just as PTE 2020-02 brings the written requirement of why a rollover is in the best interests of participants into play.

That difference shouldn’t come as a surprise to anyone who has ever compared the fees in their 401(k) to an IRA. Most 401(k)s benefit from institutional pricing, and if the menu of available investment options isn’t quite as broad as that in an IRA, they benefit from the selection and monitoring by ERISA fiduciaries. Yes, IRAs are just that—individual retirement accounts—smaller, generally speaking with more options—and yes, much more likely to be charged retail mutual fund fees—more expensive. In that sense the report—though it’s garnered headlines of late—doesn’t really tell us anything we didn’t know, if we’d only stop to acknowledge it. 

However, sure as I am willing to accept the conclusions based on both personal experience and professional acumen, I am a tad skeptical in the results of the analysis. The title is truer than one might expect. The title of the report speaks volumes as it says: “Small Differences in Mutual Fund Fees Can Cut Billions From Americans' Retirement Savings.” Because, after all, it surely could—but does it?

The report that is garnering so much attention now claims that, in the aggregate, the amount of retirement savings lost in such rollovers potentially reaches tens of billions of dollars. Citing data from the Investment Company Institute, the report notes that in 2018 alone, investors rolled $516.7 billion from employer retirement plans into traditional IRAs. They go on to assert that an analysis of fee differentials suggests that over a hypothetical retirement period of 25 years, those retail investors could see an aggregate reduction in savings of about $45.5 billion—just from that single year of rollovers.

Math ‘Problems’

The analysis—based on data from Survivor-Bias-Free U.S. Mutual Fund Database, Center for Research in Security Prices—though it relies on medians and averages for its fee conclusions—and, based on those, it asserts that annual expenses for median retail shares (ostensibly what you’d have access to in an IRA) were 0.34 percentage points higher than those for institutional shares (again, ostensibly what you’d have access to via your typical 401(k). Similar projections are presented for hybrid, and for what the analysis purports to be the smallest median fee difference. Having chosen these points of reference, the analysis simply does the math.[i]

Rollover Rationales

Regardless of the size of the differential—what role, if any, do fees play in these rollover decisions? Suffice it to say—not much. 

At least according to another report[ii] published last September by Pew, based on a survey of 1,125 older workers and recent retirees ages 55 to 75 between May 12 and June 5, 2020—roughly half currently and the rest working full time, though all had at least $30,000 in retirement savings. The survey asked participants a series of questions about whom they had consulted in deciding what to do with their retirement savings and how they planned to handle their savings (in the case of those still working), or what they had done with their savings (in the case of retirees).

Now, there are many reasons underlying the distribution decision—fees, convenience, investment options—but when the workers weighed in they said they were most motivated to stay in their current plan because they preferred the investment options—a reason cited by 50% of respondents as the most important reason, and mentioned by nearly three-quarters (73%) as at least one reason why they intend to leave their savings in their current plan when they retire. Not surprisingly—since those surveyed had at least $30,000 in savings—more than half felt that staying in their current plan would be convenient.

On the other hand, only about 3 in 10 were motivated to plan on keeping their savings in their current plan because they thought it would have lower fees than other options, and a mere 15% said lower fees in their current plan was the most important reason for planning to leave their savings where they are.

‘Control’ Voice

Near-retirees planning to roll their savings into an IRA at retirement were similarly motivated by convenience and investment options, according to the report. However, the strongest motivating factor for those respondents was the ability to have greater control over their investments, with more than 6 in 10 (63%) saying that was one reason that they planned to roll their workplace savings into an IRA, while for nearly 4 in 10 it was the most important reason. Roughly a quarter said that investment performance was behind their plan to move their savings into an IRA when they retired, and the same number actually said it was because the IRA had lower fees. 

Control was most important among retirees as well; about 18% of retirees cited lower fees as a reason for rolling over their savings, slightly less than the 25% of near retirees who cited fees as a reason—more specifically that the IRA had lower fees than their current plan. Only 4% of retirees said it was the most important reason, nearly identical to the 3% of near retirees who said the same.

Said another way, fees were not a major consideration in the rollover decision—and when it did manifest itself as a reason, it was because the IRA fees were believed to be lower than their current plan. Which, again, in view of certain market realities, suggests that those workers didn’t appreciate/understand the fees paid in their 401(k).  

The reality is, a small difference in mutual fund fees can cut billions from Americans’ savings—an impact that, unfortunately, many of those contemplating a rollover may not realize[iii] or prioritize in their decisions. 

That said, while those new disclosures documenting why a rollover is in the participants’ best interest may not solve the problem—they should make it easier for advisors to help them better understand what they may be giving up. And perhaps all of this attention to this important issue will help participants who aren't working with an advisor to "look" before they simply leap... 

- Nevin E. Adams, JD

[i] While the comparisons are certainly “directionally” accurate assuming the math is correct, the size and scope of the impact surely suffer from the imprecision of the markers employed. But considering the sheer size of the rollover market (it now outpaces that of the 401(k), it’s surely a significant amount.

[ii] Pew Survey Explores Consumer Trend to Roll Over Workplace Savings Into IRA Plans

[iii] The Pew report notes that “although few said that they would continue a rollover into an IRA with higher fees than their workplace plan, previous research by Pew has shown that many people struggle to fully understand their investment fees. Just 25% of workers in an earlier Pew survey said that they had read and understood the fee disclosure of their retirement account. 

Saturday, July 02, 2022

Dividing Lines

 It’s been said that there remains more that unites us than divides us—but that’s not how it feels most days. 

However, such times are not all that unusual for this diverse nation. Indeed, if today’s battle lines do seem harsher and more extreme, my sense is that it’s only because they are magnified by media and social media, transported to us every minute of the day and night by devices we dare not relinquish any longer than to recharge the battery.

Consider the nation’s declaration of independence which we will commemorate on Monday. Students of history—not to mention aficionados of the musical 1776 or readers of David McCullough’s John Adams or viewers of its HBO miniseries adaptation—know that the decision to declare independence was no easy matter. Indeed, the political bartering and frustrations involved in getting to a “unanimous Declaration of the thirteen United States of America” would have been all-too familiar to the legislators of today. Even then, it was declared to be “unanimous” only because one of the 13 colonies voting was persuaded to abstain from the vote rather than oppose it. 

While we celebrate the Fourth of July as Independence Day, that is neither the day on which the Continental Congress passed the resolution (July 2), nor the day on which the declaration was signed by the members of that Congress (only President of Congress John Hancock and Charles Thomson, Secretary, signed it on the 4th (the former in a hand “large enough for King George to read without his spectacles”). Most delegates didn't sign it until August 2. One didn't sign until 1781. Three delegates never signed.

The signers—who stood to lose everything they possessed, including their lives—surely did so with trepidation. Indeed, Hancock reportedly said at the signing (on August 2) that they must all stick together—to which Benjamin Franklin reportedly responded, “Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately.” 

Of course, that declaration was neither the beginning nor the end. Hostilities with England had already been underway for more than a year, the terrible winter at Valley Forge was more than a year in the future, General Cornwallis’ surrender at Yorktown was still more than five years off, and an official end to the hostilities would not come until 1783. 

Invoking the Vision

Less than 100 years later, even as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, while two American armies converged at Gettysburg for what would be the bloodiest battle in the nation’s history. Even so, President Lincoln later that year invoked the vision of the nation’s founders to launch his Gettysburg Address with the words; “Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.” This at a time when the outcome of that conflict—and his own reelection prospects a year later—were anything but certain. 

Without question we live in times of great social distress, where it seems that everything, literally everything, has been polarized and politicized into divergent and irreconcilable camps. Those looking for common ground or points of potential agreement seem to be few and far between, while those seeking compromise are typically condemned for trying. Indeed, the choices our nation faces today—on terrorism, the fighting in Ukraine, health care, energy costs, inflation, the economy, and yes, even retirement savings[i]—seem relatively modest in scope when considered next to the daunting prospects our forefathers faced in 1776. What they could not have had at that time—but what their vision has surely bequeathed to us—is a confidence in what we now consider American ideals and the resilience of the American spirit.

Their sacrifices were made a long time ago—and the liberties they fought to win, and later to preserve, are so interwoven into the fabric of our day-to-day expectations that it is easy to forget just how precious and rare they remain in this world. 

With all its faults, all its frailties, what we have here remains a special gift. It’s a national treasure we should appreciate every day—even if we only celebrate it once a year. 

- Nevin E. Adams, JD

[i] Those of us who have committed ourselves to build, expand and nurture a more secure retirement for American workers have to find solace in the overwhelmingly bipartisan legislative efforts—both in recent months, and before—in support of that goal. 

Monday, June 27, 2022

The Path(s) of Least Resistance

So, how many 401(k) accounts do you have?

At the moment, I have four—one from each of the employers in my career (including this one), all except the first one (that one went for law school and a house downpayment). Apparently I’m not alone. A recent survey of Plan Sponsor Council of America members found that only 18% of respondents had a single 401(k) account. Nearly as many (14.3%) had five. As it turns out, three was the most common response.

I joke that it’s just “market research”—after all, what better way to assess the quality of various retirement plan offerings than to have your own 401(k) supported by some of the best? Sure, there’s been institutional pricing at one that I’d hate to lose, access to a specific managed account platform that I value, and a really cool online platform at another—and then, in the back of my mind, is a concern that the taxability detail might get “jostled” in the process—in short, plenty of reasons to rationalize my leaving them where they are. But the truth of the matter is that moving your account remains a bit of a pain.

That has a number of implications, not the least of which is people can (and do) lose track of those “left behind” 401(k) accounts. That’s been an issue of some concern by both regulators and legislators alike—with potential remedies (or at least remedial efforts) like a “lost and found” directory. Perhaps just as significantly, the SECURE Act’s directive with regard to reporting projected retirement income numbers on participant statements won’t do anyone much good if it’s based on only one of the three or four account balances you actually have.[i]

There are other dangers[ii] in having multiple accounts—as they create multiple opportunities for hackers to access them. This is a particular concern when there’s been a change in recordkeepers (which is happening a lot these days), when you have a new account set up for you—but you don’t get around to promptly establishing a secure password (along with multi-factor authentication, personalized answers to key security questions, and electronic notifications of any changes to your account). After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.  

Now, I’m guessing that the reality is that most people who leave their 401(k) accounts behind do so simply because it has become the easy no-action-required default (well, as long as your balance is over $5,000—if less than that, and certainly if less than $1,000, your “easy” default is likely a lump sum payment, taxed, and likely subject to premature withdrawal penalties as well. Indeed, the leakage that so many fret over—due to hardship withdrawals or loans—is fairly inconsequential. The exception, of course, is the loans that are outstanding when termination occurs—as well as the “forced” distributions at termination. A recent assessment by Alight notes that 80% of people who had an account of less than $1,000 cashed out at termination, while nearly two-thirds of those with balances between $1,000 and $5,000 did so.

Enter the Advancing Auto Portability Act of 2022, introduced by Sens. Tim Scott (R-SC) and Sherrod Brown (D-OH), provisions of which have been incorporated in the recently introduced Enhancing Americans’ Retirement Now (EARN) Act. The size of the leakage issue the legislation seeks to stem has been wildly exaggerated by some, but the Employee Benefit Research Institute credibly says auto-portability has the potential to preserve up to $1.5 trillion in retirement savings over a 40-year period. 

That’s right—just like automatic enrollment helps people get started doing the right thing, auto-portability is basically an infrastructure design that automatically helps participants—and most notably participants with small balances—and rolls those balances into an IRA, and then—if available and desirable—rolls that into their new employer’s retirement plan. But more than giving it structure, and legislative “legitimacy” (the Department of Labor lent some help in terms of a prohibited transaction exemption in 2019), the legislation provides a $500 tax credit for adopting small business employers to defray the costs of making the connections.     

Now, at the point of my job changes, it wouldn’t have taken much for me to decide to roll those balances into my new employer’s plan—but it took absolutely nothing at all for me to just leave them where they were—the path of least resistance. On the other hand, the default for those who have smaller balances—who are often just getting started doing the right thing by saving—is a default that requires that they “start over”—with a “forced” distribution, and one reduced by state and federal taxes, and likely a 10% penalty to boot. 

It's time we all had a path of least resistance that makes it easy for us to do the “right” thing. And now perhaps we do.

- Nevin E. Adams, JD

[i] In fairness, there are already concerns that the calculation proposed by the Labor Department in response to the SECURE Act’s directive already has shortcomings. Specifically, it would assume that the participant: (1) is retiring at age 67 (the Social Security full retirement age for many workers) or the participant's actual age, if older than 67); (2) uses an interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates; (3) estimates life expectancy from a gender-neutral mortality table pursuant to IRC Sec. 417(e)(3)(B)—oh, and the biggie—(4) uses the current account value—assuming no further contributions.

[ii] Another “casualty” of multiple 401(k) accounts? When a provider publishes a list of “average” 401(k) balances (and 401(k) critics pounce on those as inadequate)—well, they might not have the whole picture. 


Saturday, June 18, 2022

Conversation "Starters"

This weekend is, of course, Father’s Day—but my dad’s decision to retire was driven more by time than timing. 

Like many of his generation, once he got to 65, it was time to “retire.” He didn’t have a pension (fortunately for him, my mother did), though he had Social Security, and savings in a 403(b) plan that he contributed to later in life—reluctantly—once he saw Mom’s modest savings in her 403(b) account grow.  

My dad was a man of (very) few words—at least spoken words. Conversations with him generally required… effort. Oh, he’d respond to direct questions, but his answers tended to be short and—well, direct. Again, like many of his generation, mostly he was content to let my mother be the conversationalist in family settings.   

So, when Dad turned to me one weekend afternoon for some input on his retirement planning—well, I was surprised. Not that it didn’t warrant a discussion, mind you—but it was not something we had ever discussed—and more’s the pity. That said, I dived into the financials, played through some spreadsheet projections, and—at the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides—when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

That, of course, was also the mindset of many in my dad’s generation—not how much we’ll need, but how much we’ll actually have. Ultimately, of course—certainly at the brink of retirement, that’s the reality of living in retirement. 

Now, the 32nd annual Retirement Confidence Survey, published by the Employee Benefit Research Institute (EBRI) and Greenwald Research, finds that nearly three quarters (73%) of American workers feel confident in their ability to live comfortably in retirement—indeed, 28% feel very confident (though nearly 6 in 10 say that preparing for retirement makes them feel stressed). While that assessment predated the recent market tumult (and there has been some correlation between the markets and retirement confidence over the years), much less the sustained inflation “bite,”[i] Americans’ confidence in retirement has proven to be pretty resilient—and this despite the persistent finding that many haven’t taken the time to do even a single estimate of their projected needs[ii]—and, at least traditionally, that included measures as unscientific as “guessing.”

Now, as it turned out, my analysis of my dad’s situation (stripped of all the fancy “upside potential” possibilities) affirmed his retirement decision—or at least it didn’t put him off it. I’ve wondered from time to time since what he would have done if it hadn’t. My guess is that, like many Americans confronted with those same realities, he’d have “adjusted.” To this day, I feel really lucky that he didn’t have to (if mostly because my mom’s planning compensated for his lack thereof). 

If it’s a conversation you haven’t (yet) had with your parents—or kids—perhaps it’s time you did.

- Nevin E. Adams, JD

[i] Though, a third of workers and half of retirees who feel less confident cite inflation and the cost of living as the reason for their declining retirement confidence. 

[ii] However, and while it’s far from optimal, the most recent RCS did find that more than half (58 percent) ages 55 or older have tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

Saturday, June 11, 2022

Social Insecurities

Last week the Treasury Department’s Social Security Board of Trustees released its annual report in a classic case of good news, bad news.

The good news, of a sort, was that the date through which Social Security will be able to pay scheduled benefits was projected to be 2034—and while that’s not very far away, it was a year later than the prior year’s report had indicated. The bad news, of course, is that without some kind of adjustment the program won’t be able to pay those scheduled benefits beyond 2034.[i]

Now, that’s not the same as “going broke” or running out of money—but, as things stand now—assuming no adjustment is made—a possible outcome would be that the scheduled benefits paid would only be about three-fourths of “scheduled.”[ii]

What’s weird is that it’s hard to find anybody who seems to think the problem won’t get fixed at some point—though the definitions of “fixed” vary—and nobody is willing to hazard a guess on who’s going to step up, much less when or how. 

The ‘How’

Of course, the how is relatively straightforward. Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving what was then a much more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:

  1. increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
  2. reducing benefits, either by raising the claiming age —or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 

So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination—as it was in 1983—is the approach that seems the most likely outcome. That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult—the more expensive—it will be.

Whatever that system’s historic successes, and the dependence of the nation’s retirees on its benefits, I think most in my generation—and certainly those in my children’s—have doubts as to its long-term financial sustainability. Adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits paid from that system have been subjected to taxation (effectively reducing benefits, particularly since those limits weren’t adjusted for inflation)—and most honest folk (even politicians) will admit that those same kinds of changes will be required again to avert the future funding crisis.

To get a sense for just how endemic Social Security is to retirement planning, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits. Indeed, considering how many Americans rely on Social Security as their sole—or at least a primary—source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers. But for the most part it seems to be left to “someone else, some other time.” 

Without a doubt, Social Security is most certainly the biggest retirement assumption—by individuals, retirement planners and legislators alike. At a time when we’re working to broaden coverage, to expand the impact of automatic plan design features, and the reach of state-run IRA programs, we know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system—they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

The “math” in the trustees’ report suggests we just picked up an “extra” year to solve the problem. Let’s not waste it.

- Nevin E. Adams, JD

[i] Lest we forget, the Medicare program is in (even) worse shape. But that’s a post for another day.

[ii] Not that the potential beneficiaries have a solid grasp on how the program works even under the best of circumstances—see Many Near-Retirees in the Dark About How Social Security Works.

Saturday, June 04, 2022

Middle "Grounds"

 A new report entitled “The Missing Middle” by the National Institute on Retirement Security (NIRS) treads some all-too-familiar ground, myopically focusing on one element of the nation’s private retirement system.

The articulated concern is, of course, the “middle”—an income grouping for which Social Security’s progressive structure doesn’t reach high enough to provide an adequate replacement income, but that lacks the more expansive financial wherewithal of those at the upper end of the income strata.

According to the paper, the tax incentives that arguably existed at the birth of the 401(k) have been muted due to lower marginal tax rates and the expansion of the standard deduction—both of which serve to mitigate the tax burden on lower-income individuals—but in the process also arguably lessen the financial incentive for deferring taxes. And if that were not enough, the authors also argue that the “…tax benefits relating to investment returns may be less in a market with lower returns.”

Of course, the focus of the authors here is the tax incentives for retirement savings[i]—and, unsurprisingly, the premise is that those with lower incomes—and thus less tax liability—get less from the current tax deferrals afforded 401(k) contributions than do those at higher incomes (who pay more in taxes). And, if you look only at that aspect—and that’s where most such critiques stop—it’s a fair point.

Before going into the shortcomings in that analysis, I’ll admit that there are certain legitimate economic realities that the paper highlights—that higher-income (and by this we don’t necessarily mean wealthy) individuals are more likely to have access to a retirement plan through work, that there are racial aspects that correlate to wealth inequities and access in the workplace, that the Saver’s Credit as currently designed (requiring a long-form tax filing to claim and being non-refundable) aren’t available to many who would otherwise be eligible, and that Social Security, though an underlying foundation of private requirement as a whole, and particularly for lower-income individuals, has funding issues of its own to fulfill the current benefit promises.[ii]

‘Missing’ Interactions

Unfortunately, as noted above, these types of analyses always gloss over the interrelationships between the tax incentives and the creation of these plans in the first place. It is assumed (generally implicitly) that employers that want to be considered an “employer of choice” will be forced to offer these plans regardless of the tax preferences to do so. Let’s face it, the tax preferences—though modest at an individual level—do provide an incentive to not only offer the plan, but—in most cases—to provide a matching contribution. A matching contribution that these type critiques always seem to gloss over (it does make their math simpler). And let’s face it, there’s no question that having access to a plan matters—even this NIRS paper acknowledges that those with access are 15 times more likely to save. 

What’s also glossed over is the impact of non-discrimination tests and legal contribution limits—limits that work, and work as designed, to keep an effective balance between the benefits of higher-paid and other workers. In fact, data from the Employee Benefit Research Institute has proven that while higher-income individuals do have higher account balances, those balances are in rough proportion to their incomes. 

In calling for a “recalibration” of what they see as a “fundamentally inequitable system,” the well-intentioned authors are missing the mark. By focusing exclusively on the individual tax preferences, while at the same time ignoring the impact of tax preferences on the decision to offer a plan in the first place, as well as the influence of non-discrimination testing in encouraging an employer match (not to mention the financial impact that has on the retirement prospects of non-highly compensated workers), they—and their purported solutions—turn out to be missing the point—and the very “middle” they claim the current system overlooks. 

- Nevin E. Adams, JD

[i] Once again, the trade-off for deciding to defer taking pay now, and depositing it in a trust subject to various restrictions and pre-withdrawal penalties is that you don’t pay taxes on compensation you haven’t gotten access to.

[ii] To address the perceived shortcomings identified, the authors have several solutions. Specifically, they want to boost and expand Social Security, federalize the state-run IRAs, target the Saver’s Credit to participants in those programs, and perhaps introduce a state version of the refundable government credit in place of tax incentives, which would equalize the credit. 

Saturday, May 28, 2022

Vested "Interests"

 The latest academic “dig” against 401(k) plans? Vesting schedules.

More specifically, firms with a combination of high turnover and vesting schedules, which means that workers are leaving behind employer contributions. Or, in the parlance of these new critics, being “robbed.” 

I stumbled across this “scandal” in an op-ed provocatively titled, “This giant pension scandal is hiding in plain sight,” which, in turn, drew from the points made in an academic paper titled, “Megacompany Employee Churn Meets 401(k) Vesting Schedules: A Sabotage on Workers’ Retirement Wealth.” The “scandal” is the legal vesting schedules under ERISA, notably the three-year variety in place at certain large, high-turnover employers.

The MarketWatch article[i]—and, more significantly, the academic paper[ii] upon which it is based, see the vesting schedule as part of some orchestrated conspiracy deliberately crafted to “rob”[iii] individuals of benefits/compensation to which they are entitled—ostensibly because they are incapable, and arguably in some cases, unable, to hold on to a job for a full three years. 

Indeed, Amazon draws most of the criticism here—not only for its three-year vesting schedule, but for the emphasis CEO Jeff Bezos has apparently placed on encouraging high turnover as a means of keeping perspectives “fresh.” That might work for Amazon’s business model (I suspect it matters more about the “who” than the “how often”), but in my experience, most employers find turnover to be costly, requiring the expense of finding replacements, training them, and then waiting for them to come up to speed. 

That said, a plan’s vesting schedule wouldn’t exactly seem to be “hidden.”[iv] Indeed, I have long found it to be an element that warrants a reasonable amount of discussion and specific focus during enrollment meetings, and for the very reason it exists: as an incentive to reward/retain/encourage longer-term workers (or at least it did before the shift in emphasis to automatic enrollment). I say longer term because the notion of long-term workers has shifted considerably since ERISA was passed in 1974, when the 10-year cliff vesting that was common among pension plans at the time reigned. Of course, the Tax Reform Act of 1986 established new, shorter minimum thresholds for vesting. Indeed, by the “norms” that were in place when the 401(k) came to prominence, 100% vesting within three years is “lightning fast.” 

So, what’s the beef? The argument put forward is that these vesting schedules create a “bait and switch” of sorts—the promise of an employer match kept just out of reach by a vesting schedule purposefully selected to kick in outside of the average worker’s tenure. And if that seems a tad too Machiavellian, there’s the overt actions that have been taken (particularly during COVID) by employers to reduce the workforce. 

That said, the paper speaks to some issues that are worth considering: the financial vulnerability of lower income workers, not to mention the financial literacy gaps there, and the retirement wealth gaps between men and women, as well as racial wealth gaps. We know these are real, but we also know that they are often remedied with access to a plan at work, assisted by plan design features like automatic enrollment and qualified default investment alternatives like target-date funds. 

Indeed, with regard to the latter, one of the two main recommendations of the paper (albeit with some editorializing) is to is to “collect data so we can truly assess the monster we are dealing with.”

However, the other main recommendation is problematic, if not unnecessary—specifically that we “prohibit megacompanies from using vesting schedules.” That, despite the fact that the paper itself cites data both from Vanguard and the Plan Sponsor Council of America which says that roughly half of the nation’s largest employers already provide immediate 100% vesting. 

Does a vesting schedule provide an incentive to “stick around”? Arguably it does (though it’s probably not going to trump job criteria like location), but in the words of the paper’s author, “…using vesting schedules to reduce turnover only works if employees understand the vesting policies.”

Ultimately, I’d argue that the issue to address isn’t vesting. After all, those who have access to a retirement plan, regardless of vesting, have a real edge on those who don’t. And let’s not kid ourselves—there are plenty of valid reasons, particularly amid today’s so-called “Great Resignation,” to leverage benefit programs to attract and retain talent. 

Certainly, the company match can—and should—be a factor in that arsenal, and I’d argue that the employer has a “vested” interest in that outcome—and that workers, properly informed and educated to appreciate that benefit, do as well. 

- Nevin E. Adams, JD

[i] In a nutshell: Some of America’s biggest companies run their shop floors so that low-paid front-line staff “churn,” or leave within a couple of years. This includes retailers, internet companies, leisure and hospitality companies and others. Some do it deliberately. Others do it by default, by treating such workers as disposable.

[ii] Authored by Samantha Prince, associate professor of law at Penn State Dickinson Law.

[iii] Yes, “robbed” is the word they use: “That employee is robbed of their compensation and that same $100 then goes into the pot to be allocated to other employees. When there is no immediate vesting, the company pays into the plan on one employee’s behalf but then can use that same money on behalf of another employee. This could be said to be akin to robbing Peter to pay Paul. And it is currently permissible. High turnover companies are reducing compensation costs by using the 401(k) vesting schedules.”