Saving money and growing capital financial concept. Increase wealth, income, retirement, funds, investment. Prosperity.
While employers offer a variety of different vesting schedules in 401(k) plans, ranging from immediate vesting, to 100% vesting after 3 years of service, a Penn State professor is recommending they be eliminated altogether, in a letter to the IRS’ recent request for recommendations to be included in its 2025-2026 Priority Guidance Plan.
“We strongly recommend that the IRS prioritize recommending to Congress it eliminates vesting schedules in qualified 401(k) plans,” recommends Professor Samantha Prince, Associate Professor of Law, Penn State Dickinson Law, in her letter to the IRS, along with Timothy G. Azizkhan, J.D. Penn State Dickinson Law; M.B.A. Candidate; B.A. Gettysburg College and Rebecca Hatton, J.D. Candidate, Penn State Dickinson Law.
“The pervasive use of vesting schedules in 401(k) plans has plagued the American worker since their inception,” read the letter. “The 401(k) plan’s popularity as a retirement vehicle grew largely due to an employer’s ability to match employee contributions in their plans…
“The scenario is viewed as a win-win for both employer and employee: employers take tax deductions on their contributions and employees receive additional, tax-deferred funds for retirement via these employer contributions … But vesting schedules change this story for a significant number of individuals.”
“Vesting schedules require a plan participant to satisfy a certain number of years of service before they become vested in, or entitled to, employer contributions made on their behalf,” read the letter.
In addition, when participants quit their job prior to satisfying the vesting schedule, they forfeit employer contributions. “These individuals lose out on that ‘free money’ they were likely counting on to aid them with retirement wealth accumulation,” according to the letter.
While employers frequently believe vesting schedules for their 401(k) plans support worker retention and provide cost savings, “data does not support that vesting schedules actually assist with worker retention … It does not matter if a worker is fired, laid off, or resigns: If they have not satisfied an applicable vesting schedule, they will forfeit money,” said the letter.
Related: The cost of switching jobs: A $300,000 loss in retirement savings
Ultimately, vesting schedules have “disastrous implications” on retirement security, said the letter. “People only have a limited amount of time to save for retirement and forfeiting during life’s journey frustrates the ability to adequately save. Millions of individuals are negatively impacted by vesting schedules every year by sacrificing billions of dollars that are returned to and recycled by plan administrators.”
The median job switcher sees a 0.7 percentage point decline in their retirement saving rate when they switch employers, according to a recent Vanguard study. For a worker earning $60,000 at the start of their career who switches jobs eight times across employers (for a total of nine jobs), the estimated loss in potential retirement savings could be $300,000 – enough to fund an estimated six additional years of spending in retirement, say the researchers.
Americans who leave behind just a handful of accounts early in their careers can lose out on over $90,000 by the time they retire, according to online retirement provider Pension Bee. This study examined the impact employees who leave behind small 401(k) balances - under $7,000 – and employers transferring these funds into Safe Harbor IRAs, which use low-risk investments, without the employee's consent to help manage high volumes of inactive accounts. This common administrative practice reveals the stark return differential between Safe Harbor IRAs and traditional retirement accounts.
“It can take years for plan participants to accrue employer contributions, but only one day for all those contributions to be taken away,” said the letter. “This exact scenario is occurring throughout the country and causes disproportionate impacts to vulnerable populations such as low-income workers.”
These forfeited funds from retirement accounts have also created “a sharp increase in litigation about forfeitures created by vesting schedules, particularly concerning the use of forfeitures and fiduciary duties under ERISA,” read the letter. Presently, there are at least 50 firms facing misuse of 401(k) ex-employee “forfeited funds” lawsuits, including UBS, UnitedHealth and Cigna, which have all been sued by their current and former employees in the last month.
“The elimination of vesting schedules would immediately benefit American workers for several reasons,” read the letter. “The complexity of vesting schedules would no longer serve as a roadblock that prevents workers from making informed employment and retirement planning decisions. The employer contributions that employees have rightfully earned as compensation, along with investment gains they earn on those funds, would immediately begin growing retirement savings.”
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.