The Effects of 401(k) Vesting Schedules—in Numbers
abstract. Many Americans terminate employment, voluntarily or involuntarily, prior to vesting in their 401(k) plans. This costs them a lot of money; it also saves companies a lot of money. Vesting schedules used by some 401(k) plans cause plan participants to forfeit significant portions of their compensation—employer contributions made on their behalf—that should be increasing their retirement savings. This money is recycled by such plans to offset their employer contribution obligations and other costs.
We analyzed data from Form 5500s to identify trends in and implications of vesting schedule use by 408 single-employer 401(k) plans over the five-year period of 2018-2022. Our findings show that the number of participants terminated before full vesting is growing rapidly. Further, we analyzed data from Form 5500s for 909 single-employer 401(k) plans for 2022. We found that 1.8 million plan participants forfeited compensation because they terminated employment (voluntarily or involuntarily) without being fully vested in their employer plan contributions. Amazon’s and Home Depot’s 401(k) plans have had the most affected participants for the past three years. Additionally, in the 909 plans we analyzed, we found that forfeitures used in 2022 amounted to a staggering $1.5 billion, most of which was used to reduce an employer’s contribution obligation. Our findings highlight the magnitude of the implications of 401(k) vesting schedule use and identify key companies whose plans have the most affected participants and the highest amounts of forfeitures at their disposal.
introduction
A majority of Americans do not have enough money saved to support themselves through retirement.1 Accumulating retirement savings is no easy task: Americans are expected to set aside money for retirement while many struggle to cover high, inflation-induced costs for food, housing, transportation, healthcare, and more.2 The difficulty of saving for retirement is a problem not only for savers and their families, but also for federal and state governments and their taxpayers.3
Employers have tax incentives to assist their employees with saving for retirement. As a result, many employers offer retirement savings vehicles such as 401(k) plans and contribute vast sums of money to their plans annually. But not all 401(k) plans are created equal. Plan features can vary significantly: participants who work for some companies have lesser benefits than others, and some also forfeit such compensation upon termination of employment. Our research primarily focused on one specific 401(k) plan feature—vesting schedules—and the resulting forfeitures. This Essay’s purpose is to summarize and release our data together with our findings. Future articles will discuss the policy implications of our findings.
When creating a 401(k) plan, an employer chooses whether to vest its contributions immediately or utilize a vesting schedule. Employers view this choice differently. Some employers do not use a vesting schedule, likely because they want to offer better benefits to attract and retain workers. Perhaps offering better retirement benefits is also part of the company’s culture. Other employers—particularly those who experience high turnover—use vesting schedules to incentivize workers to stay longer, in the hope that workers will stay at least long enough to vest in their employer contributions.4 Employee retention is often paired with other financial advantages as well. When a plan participant’s employment ends prior to vesting, the plan must use the forfeited funds, and this recycling generates savings for employers as well.5
Employer savings achieved by vesting schedules certainly benefit employers, but vesting schedules often become mechanisms that negatively foster wealth redistribution. Forfeited employer contributions are removed from participant accounts—which are commonly held by vulnerable groups that traditionally struggle to accumulate retirement wealth—and are returned to the plan trust. In turn, plan administrators can redistribute forfeited funds to remaining participants who likely hold higher-paid positions with drastically diminished turnover rates. Retirement savings are essentially transferred from workers that will need those funds when ready to retire to workers that can much more easily accumulate retirement wealth. Over the past three years, the Amazon 401(k) Plan and the Home Depot Futurebuilder Plan have seen the highest numbers of participants terminate employment without being fully vested. As such, we emphasize throughout how Amazon’s and Home Depot’s plan numbers compare to others.
In this Essay, we present several figures and tables that provide a glimpse into the implications of vesting schedule usage. At times, we refer to companies rather than their 401(k) plans for succinctness. When reference is made to the company, it incorporates its 401(k) plan. For instance, we sometimes refer to the Home Depot Futurebuilder plan as Home Depot or Home Depot’s 401(k) plan for short. Additionally, the term “affected participants” refers to participants who terminated without being fully vested in their account balances. The term “terminated” means ceased employment, whether voluntarily or involuntarily.
In our study, we share data on the number of participants who have terminated without being fully vested in 909 single-employer qualified 401(k) plans for 2022.6 We also highlight the top ten companies with the greatest numbers of these participants over the past five years. We compiled data that show the astronomical amounts of money that participants forfeit and what plans do with this money. We analyzed this data both cumulatively and individually to identify the plans that used the largest forfeiture dollar amounts in 2022. We then compared competitor companies and found that companies’ plans that use vesting schedules have competitors whose plans immediately vest their participants and hence have no forfeitures to use. Companies that assist other employers in forming, amending, or administering 401(k) plans, while also using vesting schedules themselves, were closely examined in comparison to competitors that offer immediate vesting for company contributions. Lastly, we compiled a nonexhaustive list of plans that changed from immediate vesting to a vesting schedule.
In the United States, workers rely heavily on money that employers contribute to supplement their retirement savings. Our findings suggest that the problems with vesting schedules together with their resulting forfeitures loom large and in practice run afoul of this reliance. Permitting the use of vesting schedules for employer contributions minimizes workers’ ability to save because they forfeit the money that employers contribute on their behalf to the extent not yet vested. Once forfeited, a majority of the plans we studied use this money in a manner that allows employers to experience savings. Indeed, most of this money is used to offset future employer contributions. Since matching contributions—a prevalent type of employer contribution—are contingent upon salary deferrals, it is possible that higher-paid participants receive more money in employer contributions.7 And vesting schedule use exacerbates the ability of the more vulnerable members of society to accumulate retirement wealth.8
i. how vesting schedules and forfeitures work9
Employees, as participants in a company’s retirement plan, are able to make direct contributions to their 401(k) plans by contributing a certain percentage of theirsalary.10 These direct contributions made by participants are known as “salary deferrals.”11 Participants are 100% vested in funds they contribute as salary deferrals.12 But employer contributions are either immediately vested or can be subject to one of two types of vesting schedules: cliff vesting or graded vesting.13 Cliff vesting means that the plan participant will vest 100% after a certain number of years of service (usually defined as 1,000 hours in a year) but will have no vested balance before that is achieved.14 This means that the participant is either entitled to all of the employer contributions or none of them.15
Unlike cliff vesting, graded vesting occurs incrementally over a number of years.16 The Internal Revenue Code (IRC) and accompanying regulations outline the two minimum vesting schedules that serve as baselines for employer contributions to 401(k) plans: three-year cliff and six-year graded.17
In three-year cliff vesting, the participant vests 100% in year three after achieving 1,000 hours of service for three consecutive years.18
Instead of using a vesting schedule, a plan can provide for immediate vesting, or it can adopt a variation of the above, so long as the schedule is at least as favorable to the participants as one of the two shown above.20 For instance, a plan can have a one-year cliff, which is better for the participant than a three-year cliff, or a plan can be four-year graded, which is better for the participant than six-year graded.
When a participant’s employment ends, voluntarily or involuntarily, prior to vesting, they forfeit the money that is not yet vested. Because money that gets contributed into the plan becomes a plan trust asset that must be held in a trust fund to ensure it is used “solely to benefit the participants and their beneficiaries,”21 it cannot be returned to the employer—that is, it must be used for plan purposes. A plan document governs how the plan may use the forfeited funds. The options for forfeited-fund use are provided by a 1984 Revenue Ruling and Treasury Regulations.22 Forfeited funds may be used (1) to reduce future employer contributions including corrective distributions; (2) to pay reasonable administrative expenses; (3) to provide additional contributions to current participants; and/or (4) to restore previously forfeited participant accounts.23 Many plans allow for a combination of these uses, and the plan administrator can choose what is best in any given year.24 Some plans provide a hierarchy for how forfeitures must be used.25
Forfeiture rules directly allow the employer to recycle monies it has contributed to its 401(k) plan, thereby reducing the requirement to continue to fund employer contributions and other related expenses with new money.26 These rules lead to negative effects on retirement savings for more transient low- and middle-income workers while subsequently bolstering the retirement of the highest-paid employees occupying low-turnover positions.27 When companies know they have high turnover and use a vesting schedule, they “flout[] the historical employee retention rationale underlying vesting” by double dipping and using forfeited funds to reduce their own costs.28 A significant number of those that fill these high-turnover positions are low-paid workers and people of color—groups that historically lack advantages such as generational wealth and greater financial literacy to assist in retirement saving.29 These workers thus lose out on retirement savings in far higher numbers and rates than their higher-paid coworkers and supervisors.30
Additionally, when the plan administrator chooses the option to distribute the forfeitures among current participants (option three above), they are redistributing contributions that the employer likely made on behalf of lower-paid, high-turnover employees to employees who do not turn over and are likely paid more.31 These higher-paid, low-turnover individuals also retain a substantially higher balance of retirement benefits than lower-income individuals and their respective households.32 Such reallocations create a disparity because they are generally based on the participants’ salary deferral percentage.33 Higher-paid employees generally are more loyal and save more by contributing higher percentages of their pay to their 401(k) plans.34
Fundamentally, accumulating retirement savings is difficult for many people. Every potential source of retirement savings could affect the financial security of an individual once they are no longer able to work. Retirement insecurity and an uncertain financial future represent the dangerous reality faced by millions of Americans.35 Companies who use vesting schedules—mechanisms that foster wealth redistribution and eliminate retirement savings that individuals may desperately need in the future—exacerbate the daily struggles that Americans already experience when attempting to accumulate retirement wealth.
ii. form 5500, methods, and limitations
A. Form 5500
Form 5500 is an Annual Report required of 401(k) and other plans covered by the Employee Retirement Income Security Act.36 A publicly accessible disclosure document, it is used by the U.S. Department of Labor (DoL), Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation to ensure compliance.37 Form 5500 is also “a source of information and data for use by other Federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies.”38 Information is provided on Form 5500 as numeric line items and in text form. We relied on Form 5500s for our research.
B. Methods
Song Yi and Lynn Johnson of the DoL Employee Benefits Security Administration Office of Research and Analysis provided us with a compilation of publicly available data from Form 5500 filings for single-employer plans with the most affected participants over a period of five years. Their data extraction method was to determine generally whether a plan was a 401(k) plan based on whether the “TYPE_PENSION_BNFT_CODE” variable reported use of the “2J” code in the Form 5500 filing.39 They provided us with 1,000 of the top Form 5500 filings based on line item 6(h). Line item 6(h) represents the number of participants who terminated prior to being fully vested during the applicable plan year.40
Data we used in our analyses from DoL’s Form 5500 dataset were: line 6(h) (SEP_PARTCP_PARTL_VSTD_CNT); the plan name (PLAN_NAME); the North American Industry Classification System (NAICS) code (BUSINESS_CODE); the plan sponsor name (SPONSOR_DFE_NAME); line 6(a)(2), the number of participants at end of year (TOT_ACTIVE_PARTCP_CNT); and the plan year end date (FORM _TAX_PRD).41
The DoL-provided dataset had occasional instances where a plan was listed more than once in the same year, likely due to an amended filing. Therefore, we did not have data for 1,000 distinct plans we could use. After data were compiled into Excel spreadsheets, data cleaning and analyses were performed in R version 4.2.2. Duplicate entries were identified as having the same year and plan name or sponsor name and were subsequently removed.42 Plans with data present on the DoL-provided dataset for all five years were identified as plans having five instances of the same plan name or sponsor in the dataset (n=408).43 This subdataset was then visually inspected, and instances of a plan or sponsor name changing slightly over time were identified and conformed (e.g., “Inc.” to “LLC”) for ease of analysis. The first two numbers of NAICS codes were used to define industry sectors as described by the U.S. Bureau of Labor Statistics.44
For 2022, the dataset includes plans that had affected participants ranging from 289,820 (the highest) to 453, as indicated on line 6(h). While 453 does not represent the absolute lowest number of affected participants found in all existing 2022 Form 5500 filings, it does represent the lowest number in the 1,000 plans we were given.
For each of the 909 plans in our 2022 dataset, we manually extracted data from the Form 5500 text that reflected employer contribution types, vesting schedules used, forfeiture amounts, and forfeiture use. Manual extraction was necessary because there are no line items for information pertaining to these characteristics in Form 5500.45
Ultimately, the dataset gives future researchers a uniquely comprehensive look into retirement plans. First, the dataset includes data that are publicly accessible, ensuring that data are collected regardless of the plan administrator.46 Additionally, because Form 5500 reporting is mandatory, the dataset is inclusive of all businesses and is not reliant on eliciting responses through surveys. These two important considerations ensure that the dataset presents an accurate representation of the administration of retirement plans broadly.
C. Limitations: Forfeiture Data
In our research, we observed that a majority of plans reported clear and accurate forfeiture data. However, some plans reported inconsistent and inconclusive information relative to the amount of forfeitures and forfeiture use. In those cases, we were unable to extract reliable forfeiture data because plan descriptions (1) only reported a total balance of forfeitures on the last day of a plan year; (2) only reported the total number of forfeitures created in the plan year; (3) only provided information pertaining to how forfeitures could be used according to plan provisions; or (4) were precluded from public disclosure by DoL.
Remaining limitations stemmed from imprecise language found in forfeiture disclosures. One such limitation was our frequent inability to determine whether forfeitures were used to reduce “employer” or “company” contributions that were obligatory, discretionary, or both.47 We note that at least a portion of the contributions that forfeitures were used to reduce in 2022 was discretionary rather than obligatory.48 Another limitation was the use of terms like “approximately” or “immaterial” in forfeiture disclosures.49 Our research exacted these approximate numbers for analyses and regarded any amount labeled immaterial as having no value. As a result, the numbers provided throughout this Essay reflect the most accurate findings that could be exacted from forfeiture disclosures found in Form 5500 submissions. Our discussion in Part IV provides further information on these limitations and make suggestions for amending Form 5500.
iii. insights from original data analysis of form 5500s
A. Rising Numbers of Affected Participants: Amazon, Home Depot, and the Trade, Transportation, and Utilities Sector Lead the Pack
1. A Rapid Increase in Affected Participants50
The total number of affected participants is increasing rapidly. Figure 1 shows the number of affected participants from 2018-2022 with varying numbers of plans (n-values). For 2022, 909 plans were analyzed, showing over 1.87 million affected participants; for 2018, 886 plans were analyzed, showing over 1.22 million affected participants.51 This analysis shows that large numbers of people forfeited funds, losing compensation that could be increasing their retirement savings.
figure 1. number of affected participants over five years (n=number of plans)
Figure 2 shows our analysis of 408 plans that were consistent across all five years. Using this grouping, there were over 1.36 million affected participants in 2022.52 This subset holds the same trend as the full dataset used in Figure 1. This trend is not solely attributable to Amazon; however, as Amazon has grown, so has the number of affected participants in its 401(k) plan.53
It is important to remember that these numbers reflect individuals who participated in the companies’ 401(k) plans but did not receive the benefit of their employer contributions—at least not fully. When plans use a three-year cliff vesting schedule, and a participant has terminated prior to completing three years of service, they receive none of their employer contributions. When plans use a graded schedule, and a participant has terminated before working the number of years required to vest fully, they receive only a percentage of their employer contributions.
figure 2. number of affected participants over five years (n=408 plans)
2. Amazon’s and Home Depot’s 401(k) Plans
Amazon’s and Home Depot’s 401(k) plans have by far the most affected participants in the past three years. Tables 1-5 show the top ten plans based on numbers of affected participants. As shown, Amazon’s plan jumped to the top spot in 2020 and has retained this position throughout 2021 and 2022.54 Home Depot’s plan has been either first or second on the lists for the past five years.55 This signals that large numbers of Amazon’s and Home Depot’s workers are missing out on a valuable benefit—additional retirement savings.
The number of affected participants can show which of the companies using vesting schedules in their 401(k) plans churn more employees. If one assumes Amazon’s warehouse business is the part that incurs the highest turnover, one can infer that those in lower socioeconomic positions—warehouse workers—make up a significant portion of the affected group in their plans. Amazon’s warehouse (“Field & Customer Support”) demographics for 2022 reveal that those workers identify as 32.1% Black, 28.5% Latino/a/x, 27.8% White, 9.8% Asian, 2.1% Native American, 1.6% Multiracial, and 0.6% Other.56
A majority of the top ten plans with the most affected participants remained consistent over the five-year period. The six plans that appear in all five years are Amazon’s 401(k) Plan; The Home Depot Futurebuilder; HCA 401(k) Plan; J.C. Penney Corporation Inc. Safe Harbor 401(k) Savings Plan; Charter Communications Inc. 401(k) Savings Plan; and Sodexo 401(k) Employees Retirement Savings Plan and Trust.57
The data indicate that the number of affected participants who have forfeited retirement benefits in the top ten plans has more than doubled from 2018 to 2022.58 The percentage of affected participants has also increased from less than a quarter to over a third of the total participants in the plans that we analyzed. Broken down by year, the data conveyed the following:
-
·
In 2018, the number of affected
participants from the top ten plans is 282,855,
which represented 23% of the 886
plans we analyzed.
·
In 2019, the number of affected
participants from the top ten plans is 303,804,
which represented over 23% of the
884 plans we analyzed.
·
In 2020, the number of affected
participants from the top ten plans is 329,642,
which represented nearly 26% of the
870 plans we analyzed.
·
In 2021, the number of affected
participants from the top ten plans is 535,574,
which represented 32% of the 863
plans we analyzed.
table 1. top ten plans with most affected participants in 2022
table 2. top ten plans with most affected participants in 2021
table 3. top ten plans with most affected participants in 2020
table 4. top ten plans with most affected participants in 2019
table 5. top ten plans with most affected participants in 2018
3. The Trade, Transportation, and Utilities Sector
Plans within the NAICS sector for “Trade, Transportation, and Utilities” account for the largest portion of affected participants. Indeed, within our 2022 group of 909 plans, this sector had the highest number of affected participants by percentage, even when excluding Amazon and Home Depot from the total.59 We determined it was necessary to view the data both with Amazon and Home Depot60 and without them61 for two reasons. First, Amazon is categorized under the “Professional and Business Services” NAICS code. However, the majority of Amazon’s turnover likely occurs within jobs that would normally be considered part of the “Trade, Transportation, and Utilities” sector.62 Second, because the numbers of affected participants in Amazon’s and Home Depot’s plans are so much higher than those in other companies’ plans, the figure excluding them would be illustrative.
Amazon drives the “Professional and Business Services” sector’s status as having the second-highest number of affected participants. Including Amazon and Home Depot, “Professional and Business Services” has the second-most affected participants with 27%, and “Manufacturing” comes third with 15%.63 Excluding them, the “Manufacturing” sector is second with 19%, and “Professional and Business Services” falls to third at 15% (slightly above the “Education and Health Services” sector’s 14%).64
figure 4. percentage of affected participants by naics code sector: 2022 (n=909)
B. Massive Forfeitures: Uses of Forfeited Funds and the Choice of Cliff or Graded Versus Immediate Vesting
1. Forfeited Funds Used in 2022
In our 909-plan group, over $1.5 billion in forfeitures were used in 2022.65 As noted above, Form 5500 forfeiture disclosures vary. There is no line item for forfeiture information on Form 5500. Instead, forfeiture information is mainly found in Notes to the Financial Statements attached as part of a Form 5500 submission. Therefore, individuals submitting the form have discretion over how forfeiture information is presented. All results presented below are based on our analysis of Form 5500s that provided adequate information both to calculate and to categorize forfeiture use.66
Forfeitures can be used in various ways: to offset employer contributions, to offset expenses related to plan administration, to restore or reinstate accounts, or to reallocate to other participants on top of what they would have normally received in employer contributions.67 We first show forfeitures that were disclosed as being used for offsetting employer contributions. We then show forfeitures that were disclosed as being used for offsetting expenses related to plan administration. Some disclosures combined the forfeiture use into one amount by stating a total amount of forfeitures that were used to offset employer contributions and/or plan expenses. We use the term “unspecified use” where forfeitures were disclosed as an amount but where the category in which amounts were used was not specified.
Our findings show that most forfeitures are used to offset employer contributions.68 This is true even when Amazon’s $102 million is removed from the comparison. The $1,271,882,586 value in Table 6 may actually be an underrepresentation because, as stated above, we do not know how much of the combined or unspecified use amounts was attributable to offsetting employer contributions.
table 6. total number of forfeitures used by category in 2022
2. Vesting and Forfeitures
The three-year cliff vesting schedule subjects a participant who works fewer than three years to forfeiting all employer contributions.69 As such, one would hypothesize that plans with the most forfeiture amounts would use the three-year cliff schedule. We found that the majority of the top ten plans (six out of ten) with the highest amounts of forfeitures used three-year cliff schedules, but not all did.70
For example, HCA Healthcare uses a six-year graded schedule, yet it used $44.6 million in forfeited money to offset its obligations.71 Providence Health & Services’ 401(k) plan merged with several other plans in 2021 and 2022.72 These merged plans have retained their various vesting schedules; some are five-year graded and some are immediate. Providence’s 401(k) plan used $63.6 million in forfeitures in 2022, but it did not disclose how it used them or their origin.73
The total amount of forfeitures used in 2022 for the top ten plans was more than $365 million.74 However, the plans with the most forfeitures used are not always the ones with the highest number of affected participants.75 Only four of the top ten plans with the highest number of affected participants are in the top ten of forfeiture dollar amounts.76 For example, Home Depot’s plan had 163,990 affected participants in 2022 but did not make the top ten with the $7.3 million in forfeitures it used to offset its contribution obligation.77
There are several possible reasons for the apparent disconnect between the plans with the highest forfeiture and those with the highest number of affected participants. One reason could be a plan’s ability to use forfeitures in the next year. Companies may be carrying forward forfeited money into the next year, rather than using it for the year in which it was generated. Another reason could be the amount of employer contributions and how they are calculated. Some plans match at a lower rate and therefore have less of an employer contribution obligation. And lower paid participants are likely deferring less as well yielding lower matching contributions. While these potential explanations are plausible, there does not appear to be a singular explanation for this phenomenon.
table 7. top ten plans based on forfeiture use in 2022
3. Use of Cliff or Graded Versus Immediate Vesting Among Industry Competitors
Companies whose plans use vesting schedules often have close industry competitors whose plans use immediate vesting. Not all large or high-turnover companies’ 401(k) plans use a vesting schedule. We found industry-competitor plans that immediately vested their matching contributions rather than using a vesting schedule.78 As already shown, companies whose 401(k) plans use vesting schedules directly benefit from the use of compensation forfeited by affected participants. The tables below show a sampling of 401(k) plans that use vesting schedules—and therefore had affected participants—compared to competitor-company plans that do not use a vesting schedule (i.e., whose employer contributions immediately vest).79 The plans that use vesting schedules also used forfeitures to offset their employer contribution obligations in 2022. The comparisons discussed below are just a few of the many examples shown in Tables 9-10.
As noted throughout this Essay, Amazon’s 401(k) plan uses a three-year cliff vesting schedule and had the highest number of affected participants and forfeitures used in 2022.80 We offer a comparison to Walmart’s plan, which uses immediate vesting for matching contributions and had a higher number of participants.81 In addition to matching, Walmart’s 401(k) plan offers additional profit-sharing contributions, and those contributions are subject to a six-year graded vesting schedule, which is why its plan had a small number of affected participants.82
Home Depot’s 401(k) plan uses a three-year cliff vesting schedule and had the second highest number of affected participants in 2022.83 Home Depot’s most direct competitor is Lowe’s, and the Lowe’s 401(k) plan provides for immediate vesting.84 While the Home Depot plan’s used-forfeiture amount did not make it into the top ten, $7.3 million is quite significant.
We also compared the plans of aerospace defense contractors Northrup Grumman and Lockheed Martin.85 Northrup Grumman’s 401(k) plan had $18.9 million in forfeitures, while Lockheed Martin’s plan had none because it does not use a vesting schedule.86 Notably, the Lowe’s and Lockheed Martin plans have fewer participants than their competitors’ plans,87 yet their plans are better for workers from a retirement planning perspective.
Finally, we compared the Trader Joe’s 401(k) plan to the Whole Foods 401(k) plan. The Trader Joe’s 401(k) plan had 15,155 affected participants and over $7 million in used forfeitures.88 It has significantly fewer participants than competitor Whole Foods’s plan, and Whole Foods’s plan provides immediate vesting.89
Employees have choices on where to work, and factors that influence decision making on where to work are varied. Employees with the same relevant skillset could likely work at either of the competing companies presented in Tables 9-10. If the best retirement plan is important to the employee, they should consider which plans enable them to take advantage of maximized employer contributions. An important aspect of actually receiving employer contributions is knowing whether a plan has a vesting schedule that has to be satisfied. The below table presents numerous companies and their direct competitors to showcase that many employees across industries have an opportunity to benefit from employer contributions regardless of their tenure, and that companies can be successful despite forgoing the ability to recycle forfeitures by using immediate vesting in their 401(k) plans.
table 9. company competitors: vesting schedule use versus immediate vesting in retail
C. The Trend Toward Vesting Schedules
1. Financial Services Companies and Vesting Schedules
Financial companies with the largest number of assets under management commonly offer services that assist other employers in forming, amending, and administering their own 401(k) plans. We found that a few of the 401(k) plans for the largest asset management companies in the United States used immediate vesting, but a majority utilized vesting schedules.90
Five of the seven plans with vesting schedules identified in Table 11 used three-year cliff. Goldman Sachs’s plan now uses a two-year cliff after abandoning its immediate vesting in 2022.91 The PNC Financial Services Group’s 401(k) plan—despite having a lower number of plan participants compared to the plans of Bank of America, JP Morgan, and Fidelity Investments—had the highest number of affected participants at 3,370.92 U.S. Bancorp’s plan, with 6,448 more plan participants than the PNC Financial Services Group’s plan, used immediate vesting.93
Fidelity Investments’s and JP Morgan’s 401(k) plans had the highest amounts of forfeitures used to offset employer contributions at over $17.4 million and nearly $13.0 million, respectively.94 Unfortunately, we cannot report comparable information relative to the plans for PNC Financial Services Group, Bank of America, and Goldman Sachs since they all neglected to disclose the amount of forfeitures they used to offset employer contributions.95
The Vanguard Retirement and Savings Plan and the Citi Retirement Savings Plan both use immediate vesting for matching contributions but had affected participants due to other contributions being subject to vesting schedules.96 Vanguard’s 401(k) plan had 2,290 affected participants who forfeited nearly $10 million in “[r]etirement [p]lan [c]ontributions,” which are made by Vanguard in addition to immediately vested matching contributions but are subject to a six-year graded schedule.97 Citi’s 401(k) plan had 695 affected participants who forfeited “fixed and transition contributions” made on their behalf due to the use of a three-year cliff schedule.98
table 11. vesting schedule use in the financial sector
2. Changes from Immediate Vesting to Vesting Schedules
We found that several companies recently amended plan provisions to use a vesting schedule, thereby making it more difficult for participants to accumulate retirement wealth. Table 12’s list is not exhaustive but rather displays plans that we either came across in our dataset or found when analyzing Form 5500s for other reasons.
table 12. 401(k) plans that recently changed from immediate vesting to a vesting schedule
iv. implications and recommendations from our data
A. Implications for American Workers’ Retirement Plans
Economic topics such as interest rates, inflation, and job reports have recently become the subject of intense reporting.99 While the inadequacy of retirement savings is not usually covered with the same fervor, it is a salient issue for the American worker.100 We have sought to show how vesting schedules—which often are not even part of the conversation—exacerbate retirement insecurity for many.
In just the 909 plans we analyzed for the 2022 plan year, over 1.8 million people ceased employment prior to being fully vested in their employer contributions.101 Other years have large numbers of affected participants, too.102 Even given the low number of plans we analyzed, the data indicated that there were well over 1.2 million affected participants in each year since 2018, and the numbers have been increasing over time.103
Equally troublesome is the amount of money involved, with over $1.5 billion in forfeitures used by these 909 plans in 2022.104 Over $1.2 billion of these forfeitures were used to offset employer contributions alone.105 The total amount of forfeitures used in 2022 just for the top ten plans based on forfeiture use was over $365 million.106
Amazon’s 401(k) plan leads the pack when it comes to the most affected participants and forfeitures used in 2022.107 The reason for Amazon’s first-place status is not that it had the most employees or even the most plan participants. Its direct competitor, Walmart, had more employees and more plan participants.108 Despite Amazon and Walmart reigning as the two top employers in the country, their 401(k) plans are vastly different: Amazon’s plan uses a three-year cliff schedule while Walmart’s plan uses immediate vesting. Participants in Amazon’s 401(k) plan do not have the same benefits as those who participate in Walmart’s 401(k) plan, and vesting schedules are a prime example. Amazon’s plan uses the three-year cliff schedule with full knowledge that the average tenure of Amazon warehouse employees is just one year.109 This pairing produces large volumes of forfeitures that the Amazon plan recycles to offset its plan contribution obligations.110 Our data show that Amazon’s 401(k) plan has had the most affected participants in each of the past three years and had the highest amount of forfeitures used in 2022—the only year for which we analyzed data concerning forfeiture use.111
We also conducted a close examination of the financial services sector because, in our opinion and experience, (1) companies in this sector manage large sums of money that emanate from 401(k) plans; (2) many asset managers also operate as third-party administrators and advisors for their clients’ 401(k) plans; and (3) these companies employ the leading financial experts in the country, if not the world.112 We observed that a majority of plans belonging to financial sector companies used vesting schedules for matching contributions—predominantly a three-year cliff.113 However, some plans, like Vanguard’s and Citi’s, have immediate vesting for matching contributions and only use a vesting schedule for other employer contributions they make.114 Further, Bancorp’s 401(k) plan has immediate vesting for all forms of employer contributions, despite having more plan participants than many of its schedule-using counterparts.115 Notably, Fidelity’s plan uses a five-year graded schedule that generated over $17 million in forfeitures in 2022 that it used to offset employer contributions.116
How does this all play out for the American worker? No matter how one slices it, the numbers are alarming. While a 401(k) plan is typically touted as a significant employee “benefit” with monetary value arising from employer contributions, if a plan uses a vesting schedule and the worker ceases employment for whatever reason prior to fully vesting, the plan’s value to the worker can be significantly diminished. Our data illustrate that vesting schedules lead to astronomical amounts of forfeited funds. Each dollar of forfeitures represents money that could have been in the hands of workers who likely thought they were benefiting from employer contributions to their 401(k) plan and who could use that money for retirement.
Finally, our data indicate that financial services companies could set better examples by switching to immediate vesting rather than contributing to the retirement-insecurity problem. They could also use their positions as financial advisors to encourage their clients to cease using vesting schedules.
B. Recommendations for Improving Form 5500 Disclosures
Our ability to make certain and additional conclusions was limited by the deficient data disclosure permitted in Form 5500’s current iteration.117 Our research was ultimately conducted to show that the pervasive use of vesting schedules exacerbates retirement insecurity through the forfeiture of immense amounts of employee compensation. Metrics we sought to achieve for the 2022 plan year included (1) the exact number of forfeitures incurred and reused; (2) exact numbers for how these forfeitures were repurposed based on permissible IRS uses; and (3) accurate representations for the percentage of costs offset by forfeitures. Our results, especially the finding that over $1.5 billion of forfeitures were used to offset costs in 2022, definitively display that immense amounts of employee compensation are lost by participants as a direct result of vesting schedules. However, because our data could only generate a reliable variation of our intended metrics and because we only analyzed 909 plans, the findings we display are limited to representing minimum values. The exact number of forfeitures used to offset costs in 2022—a metric our research could not wholly achieve—should be understood to be even higher than the staggering numbers we have already generated.
1. Limitations of Current Form 5500’s Line Item 6(h)
We first observed that Form 5500’s line item 6(h), while helpful in some respects, limited our research results. The current strength in line 6(h) is that, for a given plan year, it effectively reports the number of participants that terminated employment with accrued benefits less than 100% vested.118 However, the line item does not allow for differentiation between accrued benefits such as employer matching, profit sharing, and other contributions. Differentiation can be significant with accrued benefits because benefits such as matching contributions are tied to salary deferrals, which means those who can afford to save less get less in employer contributions. We found that some plans only provide matching contributions, whereas some offer several types of contributions. We also found many instances of plans with more than one type of contribution using different vesting schedules for each type of contribution. This was true with Walmart’s 401(k) plan, which offers immediately vested matching but uses a six-year graded schedule for its profit-sharing contributions.119
Additionally, the number of affected participants identified by 6(h) cannot be directly tied to the amount of forfeitures for any given year. This is because forfeitures can be used across multiple years; that is, forfeitures from a prior year can be used the following year.120And because Form 5500 does not mandate disclosure as to how much money was forfeited in the plan year for which line 6(h) is reported, we could not provide a conclusion as to how much money affected participants in a given plan year forfeited during that same plan year. We also could not distinguish how much of the forfeitures reported was attributable to originally employer-contributed funds or investment growth on those funds.121
2. Benefits of Adding Line Items for Forfeitures, Vesting Schedules, and Demographic Data
In addition to data-entry line items, Form 5500 requires attached textual disclosures, such as “Notes to the Financial Statements” wherein lies a “plan description.” Unfortunately, there are no line items for forfeitures or vesting schedules. Form 5500’s lack of line items for forfeitures and vesting schedules limited the research results that we could generate because such information is relegated to the Notes to the Financial Statements, in the plan description section.122 Therefore, plan sponsors are afforded wide discretion in choosing the verbiage describing their forfeiture and vesting schedule information as well as the specificity of the reported information. Uniformity that could be achieved through the line-item structure is largely absent and leads to inadequate disclosure.
For example, some disclosures only cited plan provisions that detailed how forfeitures could be used, while others provided a detailed breakdown of how forfeitures were actually used.123 Similarly, some disclosures revealed the number of years until a plan participant would be fully vested in contributions but omitted the vesting gradation throughout that time period.124 These types of disclosures made it difficult to compare and get a large-scale view of the problem. Forfeitures and vesting schedules are two critical components of a 401(k) plan, and consistent reporting is necessary for producing sufficient disclosure information.
We propose that the ideal disclosure for forfeitures would be achieved by disaggregating information and creating uniformity.125 This would be accomplished by adding the following line items to Form 5500:
-
·
(1) the
total number of forfeitures available for plan use on the first day of a given
plan year;
·
(2) the
total number of contributions forfeited by affected participants in a given
plan year;
·
(3) the
total number of additional funds created in a given plan year through the
placement of forfeitures into investment accounts;126
These proposed line items would yield data points that could be used to produce even more accurate, nuanced, and insightful conclusions about forfeitures created by vesting schedules. They would also provide key data points that would be easier to extract.127 Federal agencies, Congress, and those in the private sector doing research would find such information useful.
Our research, which was somewhat limited to reflecting minimum values, would be more in-depth if we had the ability to discern exact amounts of forfeitures created and used, which would lead to the generation of solidified results. With increased disclosure uniformity, we would also be readily able to compare changes in forfeiture numbers across plan years. And the disclosure uniformity would create the opportunity to present a more accurate representation of the extent to which forfeitures continue to benefit employers at the expense of plan participants. Deeper analysis could show when and how plans use their forfeitures, how many additional funds are created by the investment of retained forfeitures, and the percentage of employer contributions that were offset by forfeitures in a given plan year. Such conclusions would produce a more intricate assessment of the disparities between the benefits employers receive and the benefits affected participants sacrifice as a direct result of pervasive vesting schedule use.
Further, Form 5500 and line 6(h) lack demographic data, which impedes our ability to see which groups—based on race, ethnicity, gender, disability, income, veteran status, and so on—are forfeiting the most funds due to vesting schedules.128 Access to such information could be instrumental in understanding the impact of vesting schedules on groups and could help explain why certain groups have greater retirement insecurity than others.129
conclusion
Based on our findings, serious consideration should be given to disallowing—not just shortening—vesting schedules. The use of vesting schedules is pervasive, and as shown throughout this Essay, their use exacerbates the retirement insecurity of so many people. Ultimately, lower retirement savings stemming from vesting schedule use negatively impact affected participants, their families, and taxpayers. Pursuing legislative action to eliminate vesting schedules is both feasible and realistic. Despite increasing political polarization and gridlock in Washington, legislation focused on retirement savings has historically enjoyed bipartisan support from Congress.130
Retirement plans are complicated. Vesting schedules are complicated. Plans can have various or multiple vesting schedules based on different types of employer contributions. It is unrealistic to expect workers of varying financial savviness to understand the different types of plans, contributions, and vesting schedules.131 Yet the United States puts the onus on individuals to discern how best to save for their retirement. In a time when it has become clear that most Americans’ retirement savings are insufficient to address their most basic needs, it is important that their retirement benefits actually inure to them. Every American worker should have the opportunity to retire when they are ready, and mechanisms like vesting schedules have contributed to preventing them from doing so for too long.
Samantha J. Prince is an Associate Professor of Law at Penn State Dickinson Law. She earned her L.L.M. (Tax) from Georgetown University Law Center; J.D. from Widener Commonwealth Law; and her B.S. in Chemistry from Muhlenberg College. Timothy G. Azizkhan is a third-year J.D./M.B.A. student at Penn State Dickinson Law. He earned his B.A. in English and Religious Studies from Gettysburg College. Cassidy R. Prince is a Ph.D. candidate at Cornell University. She earned her B.S. in Microbiology from Penn State University. Luke Gorman is a third-year law student at Penn State Dickinson Law. He earned his B.S. in Applied Mathematics and Political Science from the University of Pittsburgh.
We would like to thank numerous individuals for their assistance and advice. Thank you to Lynn Johnson and Song Yi for creating our initial dataset. Without this we would still be manually reviewing all of these plans. Additional thanks to Lucas Goodman and Ben Meiselman, who willingly gave their time and advice to discuss the direction and implications of our research, and Ruth Atomate, Alyssa Boob, Nikolajs Gaikis, Ana Maria Matovic, who provided research assistance. We would also like to thank Professor Howell Jackson, a luminary in his field, for his guidance, advice, and assistance with advocating for a change in the laws permitting 401(k) vesting schedules. Finally, we would like to thank the editors of the Yale Law Journal, particularly Yang Shao, Paige E. Underwood, Lily Moore-Eissenberg, Adam J. Schwab, Beatrice L. Brown, and Deja R. Morehead.