The Effects of 401(k) Vesting Schedules-in Numbers

Abstract

Many Americans terminate employment, voluntarily or involuntarily, prior to vesting in their company 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 401(k) 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 is 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.

Keywords: 401(k) plans, retirement plans, vesting schedules, forfeitures, Form 5500