Ten-year 'vesting' rule for pensions can be side-stepped

1948: Young office worker begins first day on the job. 1973: After 25 years of punching time cards, same office worker in same office finally earns full rights to company pension benefits.

Before 1974, a three-decade stint in one job was the rule in order to be ''vested'' in a corporate pension program. Rapid growth of such plans in the 1950s and 1960s, however, forced Congress to regulate the new ''pension industry'' and take a hard look at the likelihood that an employee would stick with one company long enough to realize those benefits.

Many young workers, of course, are job-hoppers. So one major change brought about by the 1974 passage of ERISA (Employee Retirement and Income Security Act) was the use of tax incentives to lower the vesting ''cliff'' to 10 years.

Under ERISA, employers offering pension plans were required to take on some form of earlier vesting, ''with most opting for full vesting after 10 years,'' states a report on retirement by the Committee for Economic Development in September.

One advantage to lower vesting periods is that the economy can shift quicker to structural changes, allowing workers to move into other jobs, says CED's vice-president and director of industrial studies, Kenneth McLennan.

''It doesn't do the economy any good to have workers hanging on to a declining industry,'' he says.

Working against shorter vesting, says McLennan, is this argument: ''If you want employers to invest in training their workers, they are going to need some insurance that their workers will be staying on.''

But among many employees today there is a demand to lower the vesting cliff even further. Hillel Gray, executive director of the rank-and-file Citizens' Commission on Pension Policy strongly states a commission goal:

''There should be immediate vesting. With the average job turnover between four and five years, people aren't seeing a benefit for their work. No one forces you to work 10 years for your wages, and pension plans are in essence deferred wages. . . .Vesting discriminates against people who change jobs.''

The issue of a lower vesting cliff, or even immediate vesting where a worker has a right to benefits at any time, has gotten attention on Capitol Hill, too.

Rep. Claude Pepper (D) of Florida, a powerful congressmen on retirement matters, has backed two proposals that would: (1) manadate a private pension system, recommended by a presidential commission early this year, and (2) impose five-year vesting.

Five-year vesting, argues the industry-backed Employee Benefits Research Institute, will increase the number of vested workers, but the value of benefits available to an employee upon retirement ''may be relatively low.''

The vesting issue is twofold then: Many employees want immediate or lower vesting, but many early vesting plans are not as financially beneficial as a 10 -year vesting plan.

One way out is to have workers contribute to their own pension programs through payroll deductions.

''Some companies have added defined contribution plans and thrift plans to their defined benefit plans - which are staying with 10-year vesting,'' says Anna Rappaport of William M. Mercer Inc. Mercer is an employee benefit and compensation consulting firm based in New York.

A defined contribution plan or thrift plan is basically a savings account funded with employee and employer contributions. The employee usually ''puts in 2 to 6 percent, while the employer matches that by a quarter or a half,'' Ms. Rappaport says. After three to five years, the employee is entitled to the benefits.

''Most employees, when they've been vested after that shorter time, take their lump sum and roll it over into a tax-deferred investment retirement account,'' she says.

Though this is possible with a defined benefit plan, it doesn't happen very often. Most defined benefit plans figure the pension on a formula based on the employee's last working year. If an employee does reach the 10-year mark and decides to leave the firm, he usually can't take the plan with him - whether it be to an IRA or a new employer. However, he usually does continue in the plan and receive the benefits at retirement age - unless, of course, the company goes under or the employee passes on before retirement.

Administration costs, the fact that the pension is not the ''savings account'' type, and the probability that the funds will be locked into investments until the employee reaches retirement age, make defined benefit plans nonportable.

Changing jobs for some workers, like teamsters or teachers, is no problem since they are under multiemployer plans. Pensions are easily carried over from one job to the next within a profession or industry.

But what about the corporate world, where these plans don't exist? The Pepper-backed law proposes having organizations like banks or insurance brokers take over the administrative and legal aspects of private pension plans. This would establish more uniform plans that all employers could turn to, says Roger Thomas, a staff aide on the Pension Panel of the House Select Committee on Aging.

The CED's report advocates that private pensions remain flexible, not mandatory. ''Employers and employees have widely varying needs. . .,'' it states.

The report's own proposal to the issue of portable pensions takes a different tack from the one on Capitol Hill: ''The employer could be permitted to offer the employee leaving the pension plan the option of transferring vested benefits into an . . . IRA or life insurance annuity. This may be an especially attractive option when the pension plan is fully funded.''