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

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[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.”

Mothers' Day

As kids, we often struggle with our parents’ attempts to help us make good choices—and, at least in my family, Mom caught the brunt of all that (at least from me). 

We were probably like most families at the time in that we never really talked about money or finance. Doubtless that was in no small part because neither of those were in abundance in our household. But mostly, I suspect, it was because that was just one of “those” topics that were deemed to be private.

In our house Mom was definitely our family’s CFO. See, like many in his generation, my dad wanted to hold the checkbook, but it was Mom who always made sure that there was money in the account. She’s the one who started setting aside money from her paycheck in her 403(b) plan at work—and continued to do so, even when my father was convinced they couldn’t afford it—and made no secret of that opinion. Or did until he got a glimpse of the statement that showed Mom’s retirement account growth—and then, inspired by that example, he began setting money aside for retirement as well. They did so relatively late in life—preachers and teachers don’t have a lot of “extra” income, after all (especially not with four kids)—and yet, with careful planning—and diligent saving—they managed. My mother—now nearly 92—is (still) living on her own and financially independent.  

Of course, women tend to live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (a result of lower incomes, as well as more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses. Among the unexpected expenses in retirement—as parents all know, are those related to your kids—because, even after they leave home and have kids (and expenses) of their own—they’re still your kids.

Sadly, because we know how much difference it can make in retirement savings, women are also less likely to work for an employer that offers a retirement plan at work—and more likely to be part-time workers, and thus less likely to be eligible to participate in those plans even when they do have access. Oh, and like my mother, they tend to outlive their spouses—often by far more than the variance in average life expectancy tables suggest.

And yet, more than a quarter century “in” to her retirement, Mom’s sacrifices over the years (which continue to this day) have allowed her to have one that is, while certainly not luxurious, comfortable. Oh, like many in her generation, she’s constantly worried about being a “burden” to her family, though—because of her preparations—there’s not much chance of that.

Not surprisingly, Mom was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible—and while I wasn’t always smart enough to take Mom’s advice in every situation, I’m happy to say that on this I did. 

Yes, mothers give us a lot, not the least of which is life itself. And on this particular Mother’s Day, I’m thankful that I’m going to be able to thank her… in person. 

- Nevin E. Adams, JD