Retention or Regressivity? The Empirical Effects of 401(k) Vesting Schedules

Abstract

Vesting requirements are a common yet understudied feature of defined-contribution retirement plans. Using administrative recordkeeping data, we find that 30% of separations occur during participants' vesting periods. The resulting forfeitures of employer contributions are concentrated among lower-income participants and make the distribution of 401(k) compensation significantly more regressive. Firms do not enjoy offsetting efficiency benefits: employing both cross-plan and within-plan identification strategies, we find no evidence that vesting exerts a causal retention effect. A linked survey shows informational frictions to be a key mechanism, as a majority of respondents do not know their current plan's vesting rules.

Keywords: 401(k) plans, vesting, retirement

JEL Classification: D1, G50, G51, J26, J32, J63, M52