GAO Report: Some Plan Designs May Reduce Retirement Savings
There are various practices that retirement plan sponsors can utilize to reduce their outlays for younger employees, and those that relocate to other employers soon after being employed. The General Accountability Office (“GAO”) recently examined those plan design opportunities, and is signaling alarm bells. The GAO has communicated their apprehensions to Congress that these options can limit employees’ ultimate retirement savings potential.
The GAO concentrated on plan sponsors’ ability to:
- Defer eligibility until the plan participant attains age 21,
- Limit eligibility for a year’s worth of matching contributions only to participants employed by the sponsor on the last day of that year, and
- Use vesting to limit participant claims on employer matching contributions until participants have recorded a specified amount of years of participation in the plan.
The survey concluded that 41% of plans include a minimum age requirement of 21. The effect on an 18-year-old “average earner” based on what the participant would have deferred before age 21, containing a 3% match, would equal $134,456 less in savings by the time of retirement.
The GAO report also concluded that there would be $29,297 less in savings for an average employee working for a company with an end-of-year employment requirement. Lastly, the GAO studied the retirement savings impact for an employee who terminates employment at two companies before experiencing the three-year cliff vesting requirement, if those employment changes occur when the employee is 20, then age 40. The GAO projected a lost retirement savings of $81,743.
The GAO report provides a friendly reminder for plan sponsors of the flexibility available to them that they may want to implement. For instance, if your plan accepts employees as young as age 18 to participate in the plan, however, you encounter high turnover among these young employees, you may want to consider increasing the eligibility age to 21 to enter the plan.
Alternatively, if you presently don’t allow employees to enter the plan until reaching age 21, and you’re having a difficult time recruiting employees less than 21 years of age, you may want to think about moving in the opposite direction.
The Road Ahead
Ultimately, the GAO advises Congress to consider ERISA changes to prevent the lost retirement savings as described above. With that being said, the possibilities of Congress doing so aren’t very strong. Meanwhile, plan sponsors have the capability to design plans that will interest and retain employees.
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