From the U.S. Government Accountability Office, www.gao.gov Transcript for: 401(k) Eligibility and Vesting Policies Description: Audio interview by GAO staff with Charlie Jeszeck, Director, Education, Workforce and Income Security Related GAO Work: GAO-17-69: 401(k) Plans: Effects of Eligibility and Vesting Policies on Workers' Retirement Savings Released: November 2016 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's November 2016. Millions of American workers depend on their 401 (k) retirement plan savings to sustain them through their later years. It's money they've been squirreling away with each hard-earned paycheck, and in some cases, their employers have kicked in contributions, as well. But, not all 401 (k) plans are created equally, and differing eligibility and matching funds policies could have a big impact on workers' retirement savings. A team led by Charlie Jeszeck, a Director in GAO's Education Workforce and Income Security Team, recently looked at some of the policies that employers offer, and how they might affect employees' retirement savings. Jacques Arsenault sat down with Charlie to talk about what they found. [ Jacques Arsenault: ] Your team looked at some of the different eligibility investing policies that employers offer for 401 (k)s, and it seems like there can be some variations. Can you talk about what you found, in terms of different eligibility policiesEUR [ Charlie Jeszeck: ] Sure. First, I'd like to define what we mean by eligibility, and these are the requirements that are placed on participants just simply to be allowed to save in the plan. And, this is distinguished from the requirements to get the employer contributions, and also the vesting requirements, which basically say, those are the rules that allow a participant to keep their employer contributions. And basically found that all three of these requirements are actually fairly widespread in the 401 (k) world. For example, on eligibility requirements, which are things like, for example, plans can say that workers under age 21 are not eligible to participate in the plan. These range from 40 to 50 percent of all the plans that we looked at in different surveys. [ Jacques Arsenault: ] And, how about with vesting policiesEUR [ Charlie Jeszeck: ] Vesting policies are also very common. Up to almost 70 percent of plans have some form of vesting policy. In the 401 (k) world, these range from a cliff vesting, which basically says that if you leave within the first three years of your tenure, you don't get to keep any of the employer contributions, as opposed to a graded vesting plan, which over time, if you leave any time between one and six years, you could keep anywhere from zero to all of your employer contributions. [ Jacques Arsenault: ] So, with those variations, what impact can these policies have on workers' retirement savingsEUR [ Charlie Jeszeck: ] Well, the bottom line, in a lot of cases here, is that they really restrict, or they reduce the level of accumulation that employees can get into their accounts. So, for example, under cliff vesting, if you leave before three years, you would lose all of your employer contributions. So, you lose the immediate amount of the employer contribution, which could be sizeable in some cases, and then you lose the compounding of those contributions for the remainder of your career. So, that can be really quite significant. We did a number of different simulations, to looking at the effect of these policies, and we found in many cases, they can result in the employee losing thousands of dollars in their account over their careers. [ Jacques Arsenault: ] And, I know I've heard, you know, saving early is something that you do, because that money's worth so much more, so it seems like with some of these eligibility policies, it has a much greater impact, you know, if you're earlier in your career and your future earnings. [ Charlie Jeszeck: ] Oh, absolutely. And, again, this points out sort of the importance of the compounding of your account. If this happens, if you're age 18, and if you're included in the plan, and you make some contributions, and they likely would be small at that age, because you're going to be a lower-wage employee, in all likelihood. That money could be compounded for 40 years, and that could be quite a significant amount of money at the end of your career. [ Jacques Arsenault: ] Can you talk about the recommendations in the report, and how changes could improve workers' ability to save for retirementEUR [ Charlie Jeszeck: ] Yes. The main recommendation that we raised to Congress, that they should consider revising the eligibility requirements to allow workers who are under the age of 21 to be able to simply participate in the plan. I mean, right now, if you're under age 21, you can be excluded, even from making your own contributions into your pension plan. So, that was one thing we raised. We also thought that Congress should consider revising policies that deal with requiring an employee, they can only get employer contributions if they work through the last day of the year. We thought that that, again, was sort of an artifact from earlier, when 401 (k) plans didn't exist, and most account-based plans were profit-sharing plans. And, that really didn't serve the same function, now. And then, we also asked the Treasury Department to do a close evaluation of the vesting rules, just to determine whether they're appropriate, in light of today's labor market. [ Jacques Arsenault: ] And finally, what would you say is the bottom line of this reportEUR [ Charlie Jeszeck: ] I think there's a couple of things. One, a lot of these rules were put in place before 401 (k) plans even existed, and so they're really artifacts from a different pension world, and frankly, they don't really serve the same function in the current account-based system that we have. I think another issue that comes out is that account-based plans, like 401 (k) plans, are sold, that one of their main features is that they're supposedly portable. But, we see with these vesting and eligibility rules that that portability is really constrained, and in fact, the participant pays for that portability, and I think that's something, and again, given the mobility of workers today, is something that really, we should take a look at and try to fix. 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