Explanations of Vesting, Eligibility Rules Leave Some Plan Participants in the Dark


Employers are not giving their Section 401(k) plan participants clear enough explanations on the impact of the plan’s eligibility and vesting policies, a report by the Government Accountability Office said.

In an online survey of participants in four 401(k) plans, employee responses were most accurate regarding the frequency of employer contributions and participants’ initial eligibility to join the plan, but less accurate on knowledge of the plan’s eligibility and vesting policies, according to the report sent to Congress in October.

Part of the problem may lie with the summary plan description, the report said. The GAO said that its review of five SPDs “found that some eligibility and vesting policies were written using complex technical language which may make them less likely to be easily understood by the average plan participants.”

“The SDP is probably as good a mechanism as any for participants learning about the plan,” but it is not a silver bullet, Nevin Adams, chief communications officer for the American Retirement Association, told Bloomberg BNA on Dec. 6.


Some participants may also be overconfident regarding their understanding of plan policies, the report said.

Not understanding the plan policies can result in “suboptimal choices” that potentially reduce their retirement savings, the report said.

For example, individuals might choose a job with a minimum-service eligibility requirement, foregoing another job that offers immediate eligibility, it said.

Or they might be unaware that the employer’s contribution is tied to a specific day of the year, meaning they have to be employed on that day to receive the contribution.

It certainly wouldn’t hurt and might even help some participants to have clearer and more concise explanations in the SPD, Adams said.

However, though well-intentioned, the SPD is most likely to remain in the employee’s filing cabinet at home along with other benefit materials, he said.

Most participants don’t get their information from the plan on the SPD, he said. Instead, they tend to go get the information when they need it, or think they do. They might look up loan requirements when they are thinking about requesting a loan, but until they are, they may not even know if the plan allows such an option, he said.

“What participants are familiar with are the things they have actually encountered,” such as the employer match that shows up in participant statements, Adams said.

Participants are also apt not to consult the SPD concerning the impact of “last day policies,” which require workers to be employed on the last day of the plan year to be eligible to receive an employer contribution for the year, Adams said. “That’s just not on their radar screen when they are changing jobs,” he said.

At best they may think about that when they hand in their notice of resignation, by which time it may be too late to alter their quit date so that they can receive the employer match, he said.

“The more paper we give participants the less attention they pay to it,” he said. “The current system of disclosures sometimes loses sight of that fact.”

Tell Employees What They Could Lose

It might be more effective phrasing in the SPD to inform the participants of what they could lose if their contributions do not become vested—not just what they will receive, the report said.

The SPDs examined for the report “did not as clearly describe the potential forfeiture of employer contributions and returns on those contributions if a participant leaves their job before satisfying the plan’s vesting policy,” it said.

“Instead of informing a participant of what they will receive if they are not fully vested when they leave their job, an employee may better understand the financial consequences of the vesting policy if the employer clearly informs them that they will lose a percentage of their account balance if they leave before becoming fully vested,” it said.

Adams was pessimistic as to whether that explanation would make a difference, as employees don’t always consult the SPD when they make these decisions.

Participant Responsibility

Participants bear some responsibility for educating themselves on the plan terms, Adams said.

“I think ultimately individuals need to understand they have a responsibility to spend a little time to understand their benefits, to understand benefit communications, including the SPD, and to understand there could be consequences as to the timing of their decisions,” he said. “After all, you can lead a horse to water, but sometimes you can’t just get it to drink.”

See related article, Outdated 401(k) Rules Are Shortchanging Americans.

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