Senate Bill Calls for Faster Vesting, More Diversification

The Senate has passed the Pension Security and Transparency Act (S. 1783), a bill providing comprehensive reform of defined benefit plans and significant changes for defined contribution plans.

The bill requires that employees be able to diversify employer stock held in their profit sharing, stock bonus, or 401(k) plan after they have completed three years of service or are 55 years old. Stand-alone ESOPs, or KSOPs with a separate company-funded ESOP component, however, are specifically excluded.

The bill speeds vesting requirements from five-year cliff vesting to three years, while graduated vesting now must be completed in six years instead of seven. Faster vesting generally would have little impact on ESOP repurchase obligations because turnover tends to be very low anyway for people who have stayed at least three years.

The House is working on its own bill, but there are significantly different provisions for defined benefit plan reform that make passage of a final bill very uncertain.