Vesting in your 401(k) plan means that you own it. While you already own the amount you personally deposit in your 401(k) plan, you don’t own your employer’s contributions to the account until you vest in the 401(k) plan.
What Is 401(k) Vesting?
You become vested in your 401(k) plan when you qualify to keep your 401(k) match and other types of employer contributions to your account. Upon leaving a job, you cannot take company 401(k) contributions with you until you are vested in the 401(k) plan.
“Vesting in your 401(k) simply means that funds contributed on your behalf by your employer may be forfeited if you were to leave your employer before becoming fully vested,” says Amy Hubble, a certified financial planner and founding principal of Radix Financial in Oklahoma City. “Vesting restrictions do not apply to funds you’ve contributed yourself — only what your employer contributes.”
Most companies require a specific number of years of service before you are eligible to keep part or all of the company contributions to your 401(k) when you leave the job. “Oftentimes, employers will make a contribution to a participant’s 401(k), but it’s contingent upon that participant staying with the company for a certain period of time to actually receive the full benefit,” says James Conole, a certified financial planner and founder of Root Financial Partners in Solana Beach, California.
Some companies have “cliff” vesting schedules that don’t allow workers to keep employer contributions to the 401(k) plan until they have remained on the job for a specific period of time, typically one to three years. Other employers have graded vesting schedules that allow departing employees to keep a portion of their 401(k) match based on their years of service, but they generally don’t qualify for all of the 401(k) match until they have spent five or six years on the job.
Just under half of 401(k) plans (49%) provide immediate vesting of employer matching contributions, according to a Vanguard analysis of 1,700 plans with nearly 5 million participants. Employees with immediate vesting are eligible to keep company 401(k) contributions regardless of how long they work for a specific employer.
What Is Your 401(k) Vesting Schedule?
Your company’s vesting schedule explains the proportion of employer contributions that departing employees can take with them when they leave a job.
“Some companies offer immediate vesting, meaning you have access to the matching funds as soon as you start your job. Some offer a ‘step up’ sort of vesting program in that you gain a percentage of matching funds made available each year as time passes,” says Todd Sensing, a certified financial planner and founder of FamilyVest in Destin, Florida. “Also, some employers have a more black and white vesting plan in that there is a certain length of employment required to have access to any of the matching funds.”
Depending on your 401(k) plan’s specific rules, employees with similar work and savings histories might leave a job with significantly different retirement account balances. For example, let’s say an employee contributes $6,000 to his 401(k) plan over two years on the job and receives $3,000 in employer matching contributions, but then decides to change jobs. If his current employer provides immediate vesting, he can roll the entire $9,000 over to an individual retirement account. If his 401(k) plan has a three-year cliff vesting schedule, he has not stayed at his company long enough to qualify for any of the 401(k) match, and he leaves the job with only the $6,000 he contributed to the plan. If his employer has a graded vesting schedule that says he gets to keep 20% of employer 401(k) contributions for each year of service until he fully vests at five years of job tenure, he will qualify to keep 40% of the 401(k) match, or $1,200, and can roll $7,200 over to his IRA.
Vesting schedules vary considerably among different 401(k) plans, so it’s important to find out the vesting requirements for your account. “Ask your HR manager or 401(k) administrator about your company’s vesting schedule if you don’t know,” Hubble says. “The good thing is that even though you may not be eligible to roll over those funds until you meet the vesting requirements, you are still able to direct how those funds are invested and they will continue to grow alongside your contributions as long as you work for that company.”
Should You Stay at a Job Until You Are Vested in the 401(k) Plan?
Leaving a job before you are vested in the 401(k) plan could cause you to miss out on thousands of dollars in retirement savings. If you are close to the cutoff for being vested in your 401(k) plan, sticking around for a few extra weeks or months could give your nest egg a significant boost.
“If you have, say, a month left before being fully vested, you may think about staying to take access of those matching funds,” Sensing says. “On the flip side, if you are truly unhappy at your job or it is time-sensitive that you begin working at your next position, it may be worth it to you to leave some money on the table.”
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Update 09/06/22: This story was published at an earlier date and has been updated with new information.