PLANSPONSOR - April - May 2022 - 2

A Look at Vesting
INSIGHTS
R
ecently we selected the PLANSPONSOR Retirement
Plan Sponsor of the Year Finalists for 2022. Annually,
our editorial team judges the merits of each award
program entry. This year, vesting came up often: specifically,
plans using the most restrictive vesting schedules allowed.
I recognize that, for many plan sponsors, the vesting of
employer matches has a large impact on the organization's
budget and the vesting schedule is a way to help manage that. However, I think
that, alongside compensation and bonus and commissions, employer matches need
budgeting as well. The industry often frames the match as " free money, " but it's not
being treated that way. Compensation is given in exchange for work done and should
not be held hostage.
Just to be clear, in this context I'm speaking only about matching contributions,
not profit-sharing or discretionary contributions. I understand there being a longer
vesting schedule for those. After all, the idea of profit sharing is that employees are
sharing in the health and, therefore, profits of the company, so I see how employers
may view that as a way to incentivize people to stay a little longer to earn that contribution.
And I think such discretionary contributions play an important role.
But just because it's permissible to have a six-year graded vesting schedule for
matches, should you do it? When there's a long vesting schedule, it concerns me
that the framing of matching contributions may be a bit disingenuous. By this I
mean, participants are being told how much the match is, they see the money in their
account, and they watch it grow. But will they feel they've been tricked when they
depart the employer and their account is lacking some of those funds?
As an industry, we continually talk about people needing to save more, and in
these pages we have discussed structuring matches to boost participant contribution
rates. A new target is a combined participant/employer match of 15%. Many companies
that we considered for PSOY finalists have employer structures intended to
encourage participants to get to a total contribution of from 10% up to 15%. However,
noting that such a contribution is being made is, in my mind, only legitimate if
participants can take that money when they leave. If they can't, then you're not really
getting them to that target number, are you? Are we inflating retirement readiness
numbers but counting money in participant predictions that may not be a given?
As we reviewed the Plan Sponsor of the Year entries, it became difficult to determine
whether what seemed like a generous match really was. Judges realized that a
question we need to start asking on our entry forms is what about employee tenure-
what percentage of employees work long enough to keep the full match?
As plan sponsors consider their retirement plan design and their compensation
budget, vesting should get a solid review. Safe harbor plans have immediate, or
at most two-year, vesting schedules. There's an implicit message there about what
is a reasonable time.
While some may disagree, I'd argue that's what discretionary contributions are
for. A match should be thought of more as compensation and given with the intention
of participants keeping it. People should be told clearly what contributions they'll
receive and when-what's a given, and what's a " maybe " -and perhaps it should be
a smaller percentage so it's more easily budgeted and paid for. A match is only as
generous as what becomes retirement income. -Alison Cooke Mintzer, Publisher
2 PLANSPONSOR.COM April - May 2022
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