401(k) plans loosen vesting as labor market gets tighter

When it comes to 401(k) vesting policies, Greenheck Fan Corp. is as liberal as it gets. The manufacturer relaxed its vesting policies to make all of its employees — union and non-union alike — immediately vested in the company's 401(k) contributions, a move that companies are generally reluctant to make.

"From a manufacturing perspective, we felt like this could give us a little bit of an advantage in our benefit package as we're going out to recruit other employees," said Brian D. Hoover, Greenheck's human resources manager for architectural products in Schofield, Wis.

The company started shifting its employees from its six-year graded vesting schedule at the end of 2013, a process that concluded in 2015 with all employees being fully vested in company 401(k) contributions.

"I think that more manufacturers are starting to go to the 100% vesting now, but I think we wanted to get out in front of that curve and be a leader in that regard," Mr. Hoover said.

Greenheck, whose 401(k) plan has 4,300 participants and $365 million in assets, is unlike most plan sponsors. Fewer than 2 in 5 employers (38.5%) offer employees immediate vesting in 401(k) matching contributions, a number that has been stubbornly flat for the past decade, according to the Plan Sponsor Council of America's 61st annual survey of profit-sharing and 401(k) plans. Among companies comparable in size to Greenheck — those with 1,000 to 4,999 employees — the percentage is even lower, with only 30% immediately vesting their employees.

Plan sponsors often choose to implement graded vesting schedules that gradually increase to 100% over a specified period of time — typically three to six years — to reduce both plan costs and employee turnover, according to a study conducted by the Government Accountability Office in October 2016. When employees leave before being fully vested in employer contributions, they forfeit the unvested funds, which sponsors can then use to offset plan costs. Many employers also view long-term vesting as a way to retain employees.

While experts agree that vesting schedules reduce costs, they question whether they indeed lower turnover, saying today's increasingly mobile workers will jump to new jobs for better-paying positions regardless of the money they leave behind in unvested company contributions.

In the bigger scheme of things, employers may also be doing employees a disservice given today's mobile workforce, according to policy experts. Vesting schedules are not likely to alter workplace trends but will hurt the retirement savings of workers who switch jobs over their careers, they say.

In its 2016 report, the GAO calculated that if a worker leaves two jobs after two years, at ages 20 and 40, where the plan requires three years for full vesting, the worker's forfeited money — $22,143 in 2016 dollars — could have grown to $81,743 by his or her retirement.

"People are changing jobs every year, and for those people the vesting schedule matters," said Alicia H. Munnell, director for the Center of Retirement Research at Boston College, Chestnut Hill, Mass.

The mobility of the workforce, so far though, hasn't prompted plan sponsors to reconsider their vesting policies. What seems to be changing their thinking is the tight labor market, a powerful arbiter that is beginning to push employers to loosen their employee vesting.

"We want to bring more quality people in the door," said Greenheck's Mr. Hoover. By offering new hires immediate vesting, the company would "distinguish itself in the market" and be more competitive when trying to fill manufacturing posts as well as positions for accountants, engineers and other jobs, he said.

Michael Volo, a senior partner at Cammack Retirement Group Inc. in Wellesley, Mass., is seeing a loosening of 401(k) vesting policies, a byproduct he believes of a healthy economy.

"As employers compete for talent, I think they're seeing vesting schedules perhaps being a deterrent to attracting high-quality candidates," he added..

Gaining a recruiting edge was a factor in MetLife Inc.'s recent switch to immediate vesting from a five-year graded vesting schedule. The financial services company implemented the change in January as a result of the tax savings from the Trump administration's Tax Cuts and Jobs Act of 2017, which slashed corporate tax rates.

MetLife decided to "make an investment in its people" in a lasting way rather than award employees "one-time bonuses" as many companies opted to do with the tax savings, said Andrew Bernstein, the Bridgewater, N.J. -based vice president of global pensions and total rewards optimizations at MetLife.

"We opted to invest in more long-term financial security by accelerating the vesting," Mr. Bernstein said, adding that the company coupled the vesting change with new auto-enrollment and auto-escalation features.

Mr. Bernstein said that immediate vesting made MetLife more appealing as an employer. "Immediate vesting in company matches is a more attractive feature for trying to recruit employees, particularly employees who have been in the workforce for quite a while," he said of the company's $6.5 billion 401(k) plan.

The emerging use of immediate vesting policies to recruit people is a departure from the more common practice of extending the vesting schedule to retain employees, a practice that sponsors are beginning to doubt.

"If you're in an industry where you're living paycheck to paycheck, an extra dollar an hour is probably more important than that matching schedule that you have," said Kevin Skow, a retirement plan consultant, vice president and regional director with Francis Investment Counsel in Minneapolis.

Others are skeptical about how familiar employees are with their vesting schedules. "I'd be surprised if that really enters into the calculus of most workers when they're thinking about whether or not to change jobs," Ms. Munnell said.

Still others question the wisdom of trying to hold on to employees who would much rather leave.

"I think some employers are saying, 'Do we really want people to stay on just for their 401(k) match?'" said Rob Austin, Charlotte, N.C.-based head of research at Alight Solutions.

Robyn Credico, Willis Towers Watson PLC's North America defined contribution practice leader in Arlington, Va., is not seeing many sponsors relaxing or changing their vesting schedules. While vesting schedules might not have a big impact on turnover, they do reduce costs, which is a strong reason for employers sticking to vesting schedules, she said.

The money from forfeited 401(k) company contributions allows plan sponsors to offset plan expenses and even "make a larger contribution to those who are going to stay with the company," Ms. Credico said. "Instead of giving let's say 3% of pay to everybody, maybe you can give 3½% of pay," she said.

Still, more employers would liberalize their policies if they could afford to, according to Cammack's Mr. Volo. With today's healthy economy, however, the reluctance may soften, especially given changing workforce dynamics and the competition for talent, he said. "It creates a good opportunity to eliminate vesting schedules or change them to make them more employee friendly," Mr. Volo said.