Business Retirement

Are 401(k) Participants Losing Out on Retirement Savings?

Archaic 401(k) plans prompt further review by the GAO.

In a report published by the U.S. Government’s Accountability Office (GAO), it was found that existing practices permitted to plan sponsors under ERISA (Employee Retirement Income Security Act of 1974) appear to possibly hinder the average worker’s ability to maximize saving capabilities within their 401(k) plan.

As pension plan opportunities slowly dwindle, many employees seek out 401(k) options. Even more, they seek out employers who offer contribution matches and opportunities to boost their savings potential.

Unfortunately, plan sponsors are encountering a sometimes inconvenient truth that the average American’s work tenure is only 4.1 years.1 This leaves employers in a tough spot when it comes to managing the flexibility given to them by ERISA, which includes setting eligibility and vesting policies.

Without the legal framework of ERISA, employers could possibly take advantage of this flexibility, setting high age limits for participation or requiring many years of tenure before offering the possibility of investing in the 401(k). Even though ERISA has laid out some basic requirements, they aren’t bullet proof, and now the GAO is putting pen to paper to prove it.

The original purpose of some of the ERISA rules were to help employers provide profit sharing and matching contributions, but with the work tenure down to only 4 years, employees may be missing out. Many companies questioned in the report haven’t changed their vesting schedules for at least five years, and use these outdated, lengthy schedules to retain employees for longer tenures, requiring them to stay much longer before they are fully vested. Unfortunately, these schedules span longer than the average employee tenure, thus leaving employees out of matching opportunities.

The golden rule has always been to start saving early, but with the current plan flexibility under ERISA, and the fact that younger employees between ages 18 and 24 will switch jobs an average 5.5 times during their career, the GAO is showing that the existing rules could potentially leave young workers with less.1

Within their hypothetical projections, the GAO found that, “assuming a minimum age policy of 21, [it is] estimated that medium-level earner who does not save in a plan or receive 3% 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).”

In a projection based on the shortened tenure stats, the GAO also projected that, “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).1

In addition, the ERISA allows sponsors to require employees to be employed on the last day of the year in order to receive employer matching contributions. According to a projection by the GAO, “if a medium-level earner did not meet a last-day policy when leaving a job at age 30, the employer’s 3% 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).1

All in all, this amounts to some important retirement savings. The desire for companies to retain employees for longer periods of time is unfortunately overruled by the stats, leaving them in a difficult position. Even if employers updated their plans by shortening vesting schedules, lowering minimum ages, and eliminating the last-day rule, would the changes result in increased 401(k) participation? Or is it better for them to hang on to their outdated ways?

If it is up to the GAO, they might not be able to. With its findings, the GAO is looking to prod Congress to inject some new life into ERISA. If they are successful, there could be some changes to the current policies, forcing employers to “get with the times.”


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1 -401(k) Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings. GAO. October 2016. [12/23/16]

Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 16-383

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