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401k Vesting - Graduated vs Immediate

Tom Fenton's Profile

My company is converting to a 401k plan from a Simple IRA. Compliance testing will not be an issue for us so we're exploring alternatives regarding the company match and vesting period. The question we're debating is: Does graduated vesting (i.e. 5 yr term @ 20% /yr) have a negative or positive effect on employee retention. Does it encourage retention, or have no effect? The Simple IRA we have has immediate vesting. Most of the participants in the plan have 5 or more years of tenure, so would it wouldn't have an impact, but there are a few with < 5 years, and concerned that moving to a graduated vesting plan would be a negative in regards to degradation of benefits. Would like to hear comments from anyone who may have faced this issue, or can refer me to a place where white papers have been written.

Answers

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

IMHO, negative in recruiting new hires. No effect on existing employees. Thus, it comes down to how competitive the labor market is for your staffing needs.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

As much as I value loyalty, I tend to veer away from categorizing benefits (or the enjoyment of it) with length of stay. It tends to create "classes" within the company. There are other ways to reward loyalty. Also consider the overall market reality that workers nowadays are moving from one company to the next more frequently.

Is an employee who has 5yrs +1 day any different from one that has say 2 yrs service?

Having said that...it is not unusual to have a vesting period but I would consider a shorter period. I would also consider the practice of your competitor or industry.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I would agree with Emerson and find out what competitors or others similar in industry do. We are currently preparing to make the same change but I haven't answered all of the questions on how to set up the plan yet. The company we're using is also offering an automatic investment where we can designate 1% of pay goes to the plan automatically. (Of course we would have to allow for that in their pay structure), thoughts on that?

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

You presented two questions –
• What to do with current employees with years of service < 5 years – To ensure you do not create a morale issue; they should not be subjected to any waiting period once you convert. Any change you make should only be for new entrants to the company.
• Vesting period – I would shy away from a vesting schedule. Instead I would have a one year waiting period, prior to an individual joining the plan. But once they join, they are fully vested in any match.
Good luck.

Dan Ginn
Title: Human Resources Manager
Company: Italfoods, Inc.
LinkedIn Profile
(Human Resources Manager, Italfoods, Inc.) |

Good points by all. Times have changed and for many employers, retention is no longer valued as much as it once did and the laws (ERISA) have changed to reflect that. A few decades ago it was legal to have a 10 year vesting schedule but no longer. As Emerson and Regis alluded to, there are other ways to incentivize loyalty without necessarily building a structure that may have some unintended consequences.

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