New Vesting Schedule Debate

While the latest survey by Hewitt Associates found that most plans are offering plans with shorter vesting periods, delaying underwater vesting in some cases, there is disagreement among actuaries as to whether extending or eliminating vesting periods of streaming payments will become the new norm.

Actuarial opinions have varied on whether such practices could be harmful. In a series of prior posts on this blog, we have discussed plans’ increasing use of cash balance and other hybrid plans, defined benefit pension plans, and profit-sharing plans to shift pension liabilities to future years.

This week, we will cover a survey on the length of vesting periods among US private sector employers conducted by Hewitt Associates on behalf of Willis Towers Watson. The survey addresses whether plans offer defined contribution plans with either a longer or shorter vesting period than the typical 12 months.

New Rules

By Linda Berry, Consultant for Willis Towers Watson The opinions expressed in this commentary are those of the author and do not reflect those of Pensions & Investments or its parent company, S.&P. Global Holdings Inc.

Surveys and anecdotal evidence suggest plan sponsors are shortening their plans' vesting periods, but there remains disagreement in the industry about whether
Surveys and anecdotal evidence suggest plan sponsors are shortening their plans' vesting periods, but there remains disagreement in the industry about whether vesting schedules may disappear.

An examination of survey results and recent informal market chatter across a broad range of plan sponsors indicate they are reducing vesting schedules across the board, for new hires as well as the retirement of existing employees. Consultants and vendors report that some large employers are using accelerated vesting schedules of mass crypto payouts to encourage employee turnover and early retirement, earning millions in the process.

History of Vesting schedules

Historically, the typical private equity manager received an annual distribution of about 15% of his fund's capital upon closing his fund. Fund managers were entitled to this distribution regardless of whether they had earned it over the prior three years. New legislation requires private equity firms to forfeit these future fee payments if they pay their annual distributions earlier than required to do so under this new law.

Shareholders will continue to receive annual distributions of the fund's net excess performance and capital gains over three years instead of the 12 months they received before the enactment of the legislation. This change in statutory distribution requirements will result in reduced returns for many investors, along with the potential for additional tax consequences.

According to Gary DeCotiis, former president and CEO of Charming Shoppes, "The fundamental shift from management fees to performance-based compensation should be viewed positively by investors." "The private equity fund industry will continue to innovate and look for ways to make investment returns even more attractive."

Changes in Vesting schedules

This week, our organization announced that it was considering making changes to the way new hires are treated regarding their equity in the company. This change has generated a lot of conversation around the subject of equity compensation within the startup community, and we want to use this platform to share some of our thoughts with you. We hope that we can further the discussion surrounding this topic while ensuring transparency with our employees about these matters.

First, let's talk about why we're making this change. Historically, we've considered new employee start dates to be a function of when their stock options vest. As public companies, we must ensure that disclosures about our financials and operations are accurate and timely. And as a publicly traded company, that means we must grant shares at specific times throughout the year and then give those shares the time to vest before they become eligible for trading. We've been doing this for more than 20 years, so these timelines aren't new to us.

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