If your employer contributes to your 401(k) plan, your right to those contributions often depends on staying with your employer for a certain period of time or a vesting schedule. This period can vary from company to company, although it is subject to some federal rules. Understanding the vesting schedule and rules at your company can reduce or even eliminate the possibility of losing your matching employer contributions.
What is vesting?
Vesting in a retirement plan refers to owning the funds in that plan. A 401(k) plan has two types of contributions – the contribution made by the employee and the employer’s contribution to the 401(k) plan. You have a legal right to keep the contributions once you vest in matching employer contributions. You may reach a point where you can leave the company or be terminated, but you retain that money.
Types of vesting
While some employers offer immediate vesting for their matching contributions, it is common for company rules to force employees to vest according to a set schedule. This prevents employees from quitting on Friday and taking the matching contribution money that the company contributed on Thursday.
What is immediate vesting?
According to a study by investment management firm Vanguard, about 48% of the defined contribution plans they manage offered immediate vesting for matching contributions in 2021.
Graded vesting schedule
With graded vesting, you vest in your employer’s contributions at specific dates during your employment, typically becoming fully vested after five or six years. Your schedule may be more generous than this example, but it cannot be more strict, thanks to the Pension Protection Act of 2006.
Cliff vesting schedule
A cliff vesting schedule means no vesting at all for a period of time, then you become fully vested all at once, which usually occurs after one to three years of employment. This type of schedule clearly favors the employer. Your company’s cliff vesting schedule may be more generous than this schedule, but vesting will occur at least at this rate.
Conclusion
Make sure to know your employer’s vesting schedule before making any important decisions in your career. Saving for retirement is important, so you wouldn’t want to leave your job voluntarily before you vest a significant amount of matching employer contributions.
Frequently Asked Questions
What is a 401(k) vesting schedule?
A vesting schedule for a 401(k) plan is the method by which an employer’s contribution to a 401(k) plan becomes available to the employee. While employees control the money they contribute to the 401(k) plan, understanding your 401(k) vesting schedule can reduce or eliminate the possibility of losing matching employer contributions. Some companies offer immediate vesting, while others may offer graded vesting or cliff vesting. Graded vesting allows for a portion of the employer’s contribution to vest each year, typically becoming fully vested after five or six years. Cliff vesting means contributions do not vest for a certain period of time and then suddenly become 100% vested.
How do you evaluate vesting in a 401(k) plan as part of your compensation?
Employer contributions to a 401(k) plan are considered extra money going towards your retirement savings. Their value depends on the amount contributed and how the vesting works. For example, if you earn a salary of $2,000 every two weeks and contribute 5% or $100 to your 401(k), if your employer matches 100% with immediate vesting, you will receive an additional $100 right away. If the employer has a graded vesting schedule, you may have partial ownership of the funds the employer contributes, which increases each year, becoming fully vested after about six years of work. In the case of cliff vesting, you may have to wait several years before all of the employer’s contributions become fully vested.
Source:
https://www.thebalancemoney.com/know-the-impact-of-your-401k-vesting-schedule-2894176
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