Report: 401(k) rules hurt modern workers
Many company 401(k) retirement savings plans could use a swift kick into the 21st century, according to a new report from the U.S. Government Accountability Office.
A number of longtime 401(k) plan designs fail to reflect a new, more mobile workforce and hurt employees' ability to save, according to the report.
Among the arguably outmoded practices: A requirement at some plans that workers be 21 before becoming eligible to join a 401(k), that employees finish one year of service before being eligible to join a plan and then wait another year to be eligible for company matching funds, and that employees wait up to six years before being vested.
Some of those practices save companies administrative hassles when workers leave after only a short time, and others help reduce turnover, employers and retirement experts told the GAO. But as the report notes, Bureau of Labor Statistics data show the median tenure at 4.1 years for private sector workers in 2014, and federal data found that for workers from 18 to 48 the average number of jobs held was more than 11.
“Being ineligible to save in a new employer's plan for 1 year on 11 occasions, especially occurring more frequently early in a worker's career, may result in $411,439 less retirement savings,” according to the GAO's projections.
Readers could take issue with some of those projections. The GAO assumed that someone works continuously from age 18 to 66, and that the stock market's nominal long-term return will be 9.1 percent. It arrived at that by adding the Social Security Trustee's projected annual trust fund real interest rate of 2.9 percent to an inflation projection of 2.7 percent, and topping it off with an “estimated long-term premium of 3.5 percentage points.”