After being hired, how long do new employees at your company have to wait until they can contribute to your employer sponsored retirement plan? Did you know the length of time an employee is required to wait to begin participating in the retirement plan can have a direct impact on that individual’s retirement readiness? Over the past decade, we’ve seen a growing trend of retirement plans relaxing eligibility requirements. The Society for Human Resource Management reported that in 2013, 76% of defined contribution plans allowed for immediate eligibility—up from 71% in 2011 and 45% in 20011
We’ve also experienced increased trends in participation rates and distributions in tax qualified vehicles, which may be associated with relaxed eligibility standards, and ultimately can help participants become retirement ready. Haven’t embraced the trend of relaxing your plan’s eligibility requirements? Let’s examine why doing so might be a good idea for your plan.
Reducing the Gap
According to a 2012 news release from the U.S. Bureau of Labor Statistics, people born between 1957 and 1964 held 11.3 jobs from age 18-462
. The average tenure among all US workers in 2012 was 4.6 years3
. Given these averages, over a 30-year period, an individual would be losing out on seven-plus years of contributions into various employer-sponsored retirement plans if each employer had an eligibility waiting period of one year. This would mean that over 19% of this individual’s working career would have been spent waiting to become eligible to participate, and the opportunity loss would probably have a major impact on retirement readiness. Reducing the eligibility gap would allow a participant more time to contribute, and in turn, their savings to grow faster.
Another concern with longer eligibility wait time is that the participant could establish spending habits that will hinder his/her ability or willingness to save for retirement once eligible. It may be easier to explain the benefits of plan participation to a new hire that is excited about the new opportunity, than to an employee who may have lost interest or whose priorities have shifted since being hired. Relaxing eligibility periods can take advantage of this inertia and get participants in the plan. Combining automatic enrollment with relaxed eligibility provides participants the option to opt-out rather than to opt-in, making for a very effective way to increase plan participation. (For an overview of Auto Enrollment, check out this blog post on the 7 Misconceptions about Retirement Plan Auto Features
Keep the Savings Growing
As we’ve seen eligibility periods relax we’ve also seen an increase in rollovers. According to EBRI, plan-to-plan transfers and rollovers of distributions within tax-qualified savings vehicles, such as employer-sponsored retirement plans, increased from 35.4% in 1998 to 45.2% in 20124
. Shortening eligibility requirements to allow quicker if not immediate rollovers will discourage participants from cashing out and will allow balances to continue growing. Some employers even have force-out provisions that mandate action from the participant before being considered eligible to participate in a new employer’s plan, another reason to consider shortening eligibility requirements for the good of participants.
Assess your Plan’s Goals
If the plan’s goal is to help participants become ready for retirement, then relaxing the eligibility requirements could help them save sooner and longer. If your plan hasn’t embraced the trend of loosening participant eligibility, then ask yourself some simple questions:
– What is the primary purpose of having the current eligibility period?
– Is the eligibility period satisfying its purpose?
– Does the current eligibility period drive positive participant behavior results?
If these questions are hard to answer, it might be time to review your plan to analyze how different eligibility periods may impact your participants.
1 see Miller, Stephen. “Employers Boost 401(k) Match Contributions, Relax Eligibility Rules” http://www.shrm.org/hrdisciplines/benefits/articles/pages/401k-match-contributions.aspx
2 see Bureau of Labor Statistics News Release, July 25, 2012, “Number of Jobs Held, Labor Market Activity, and Earnings Growth among the Youngest Baby Boomers: Results from a Longitudinal Survey” http://www.bls.gov/news.release/pdf/nlsoy.pdf
3 see Bureau of Labor Statistics News Release, September 18, 2005, Employee Tenure Summary 2012, http://www.bls.gov/news.release/tenure.nr0.htm
4 see Copeland Ph.D., Craig, “Lump-Sum Distributions at Job Change, Distributions Through 2012”, Employer Benefit Research Institute Notes, November 2013, Vol. 34, No.11, http://www.ebri.org/pdf/notespdf/EBRI_Notes_11_Nov-13_LSDs-WBS.pdf
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