Are you looking to engage and retain your employees for longer? You’re not alone. In the current post-pandemic environment, companies are looking at every possible way to engage and retain employees longer. This applies most especially to hybrid or remote-based professionals.

A recent study found that turnover at small to midsize companies is significant, with a 25% chance of an employee leaving a company voluntarily or involuntarily before 15 months, and a 50% chance before 37 months. 

Used effectively, the vesting schedules in your retirement plans (401k, 403b, deferred compensation, and 457, to name a few) can be an excellent tool employers can use to improve employee retention.

WHAT IS A RETIREMENT PLAN VESTING SCHEDULE AND HOW DOES IT IMPROVE EMPLOYEE RETENTION? 

At its core, “vested” means ownership. A vesting schedule is a timeline that determines when employees gain full ownership of an employer contribution to their retirement plans. These employer contributions are most often an employer match but in certain plans can also be employer contributions such as a signing bonus, a retention bonus or a profit-sharing contribution. 
 
Take for example a company that contributes $5,000 to an employee’s retirement plan through a match. If that employee is 50% vested in that $5,000 employer match and the employee leaves the company, then the employee will only take the portion of the $5,000 match that the employee owns. In this example, it would be $2,500 kept by the employee and $2,500 kept by the company.

Vesting schedules incentivize employee retention and reward long-term employee commitment by leveraging a behavioral economics principle known as “loss aversion”. Loss aversion is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. Simply put, it’s better not to lose $20 than to find $20. (If you are interested in learning more about how other cognitive biases can be leveraged by employers, click here.) 

WHAT ARE COMMON VESTING SCHEDULES?

Companies often implement vesting schedules that are gradual over time. For qualified retirement plans such as a 401(k) or 403(b), Federal Internal Revenue Code (IRC) rules require full vesting within six years. According to the Plan Sponsor Council of America, almost 30% of 401(k) plans use a graded vesting schedule. Three-to-six-year vesting is a common vesting schedule used by small and midsize companies.

IN CLOSING

Vesting schedules used in a retirement plan can be a helpful tool. Vesting schedules are one of the few benefits an employer can give to their employees that automatically disappears if the employee doesn’t stay a minimum period of time. 

By tying the ownership of employer contribution (matching or profit sharing) to a vesting schedule, employers incentivize employees to stay with the company and take a long-term perspective. This can contribute to the growth and success of the company over time. 

For best results, it’s crucial to engage with an expert in employer-sponsored retirement plans, so that they can ensure a vesting schedule that is appropriately aligned with the goals of your organization.

If you’d like to learn more, drop us a line.