Vesting Under Scrutiny

Art by Alessandra DeCristofaro

Personal-finance writers around the country have taken on the subject of vesting, some criticizing the schedules by which employees gain ownership of employer contributions to their defined contribution plan accounts. 

Safe harbor plans must follow some clear vesting rules; beyond that, sponsors have considerable flexibility in structuring their plan’s vesting. “My book of business is probably skewed toward non-safe-harbor plans,” says Joe DeBello, managing consultant at OneDigital Retirement + Wealth. “The topic of vesting is a constant in our discussions.” 

Traditional safe harbor plans require immediate 100% vesting for participants. A qualified automatic contribution arrangement safe harbor plan with automatic enrollment can have up to two-year cliff vesting, says Eric Droblyen, president and CEO of Employee Fiduciary, a third-party administrator. “Often, sponsors go with the QACA safe harbor specifically because [of] two-year cliff vesting,” he observes. 

“If not forced to allow for immediate vesting, most sponsors choose to [adopt] a vesting schedule,” Droblyen continues. The Employee Retirement Income Security Act does require that plan sponsors limit cliff vesting to three years of service, at most, to become 100% vested, and graded vesting to six years. “Employers can definitely make their vesting rules more liberal, if they choose,” he says. 

Kristi Baker, managing partner at CSi Advisory Services, sees a trend in sponsors shortening their plan’s vesting period. “One issue [clients] are looking at is, ‘Does a six-year vesting schedule still make sense, for the kind of employees we’re trying to attract?” Immediate vesting is rare, except in safe harbor plans, she says. “More commonly, we see a move to three- to four-year graded vesting.” 

Vanguard’s “How America Saves 2022” report found that, last year, nearly half of plans immediately vested participants in employer matching contributions, and 25% used a five- or six-year graded schedule. The report covers 4.7 million retirement accounts. 

Typically, sponsors first decide about vesting via their choice of plan design, says Jim Sampson, national practice leader for Hilb Group Retirement Services. With non-safe-harbor plans, he says, they must determine their goal for vesting: Is it to protect the company’s money? To retain employees? To help attract new employees? “[The latter has] become a much larger part of the equation in the past year or two,” Sampson says, citing the tight labor market. “We’ve seen many companies go to immediate or shorter vesting.” 

Sampson points especially to higher-level employees in technical or medical fields, where “vesting is almost a nonstarter. They’re trying to pull people out of big employers, so they try to mirror the big employers’ benefits. But in workforces such as restaurants, hospitality and retail, where turnover is high, having a vesting schedule can make sense to employers.” It saves the company money when a worker leaves quickly and might motivate people to stay, he says. Even given that strategic value, he says, “The reality is, vesting might be a dying breed, in this post-COVID-19 workforce. We live in an instant-gratification world: People want it now.” 

The Changing Conversation 

According to Droblyen, a company’s decision about vesting “boils down to a trade-off. You need to pick what you think is more valuable to your business.” 

DeBello says he has read with puzzlement the media criticism of employers using a vesting schedule. He says he sees no unfairness in promoting an employer match as “free money,” while also having multiyear vesting.  

“We very rarely see employers that tout, ‘It’s free money with no strings attached.’” Most participants can see both their total balance and vested balance on the recordkeeper’s website, and group education meetings cover the topic, he notes. “I don’t subscribe to the idea that this is some kind of ‘bait and switch’ or mystery to employees.”