Definition of Vesting
Vesting is a term used to determine the amount of your 401(k) funds that you can take with you if you decide to leave your company. Vesting refers to the ownership of your 401(k).
All the money that you have personally contributed to your 401(k) account is yours and you can take it with you if you decide to leave your job, but things might be a little different when it comes to your employer’s contributions. Many employers set vesting guidelines to control the contributions they make to their employees’ 401(k) accounts.
Company policies can range from three to seven years before you are fully vested in your 401(k) account so that you can take the employer contributions with you if you decide to leave your job. Some may allow you to be partially vested in a portion of that amount, which increases each year until it reaches the maximum.
What happens if I leave before I am fully vested in my 401(k) account?
Suppose you have a plan that vests at a rate of 20% per year. This is known as “graded vesting.” You will be fully vested (the employer’s contribution amount will be yours) after five years in your job. You will be 60% vested if you leave your job after three years. You will be entitled to 60% of the amount your employer contributed to your 401(k) account.
If your employer does not have a graded vesting plan but you become fully vested after a specific period of time with the company, you will lose all the employer-contributed money in your 401(k) account if you leave before that period ends.
Make sure to familiarize yourself with your employer’s vesting policy, or it could cost you some significant amounts. You might even consider staying in your job longer than you originally planned to give your 401(k) account enough time to fully vest.
Why do employers have vesting policies?
Employers use vesting policies to encourage employee retention. Many employees stay in their jobs until they are fully vested in their 401(k) accounts to take advantage of the greater economic benefit.
It’s always important to consider the financial impact of a new job for this reason. You may be willing to take the hit on your 401(k) balance if your salary will increase significantly due to a job change, especially if you have only spent a year or two with the company. But it may be better to wait a few months or even a year to allow your 401(k) to fully vest before changing jobs if you are close to that point.
How can I find out the guidelines that affect me?
Talk with your company’s human resources department to ensure you have a complete understanding of the company’s vesting policies. They should be able to explain the policy and its timeline. This can help you maximize your contributions and retirement accounts and can also assist you in determining the right time to start looking for a new job.
Does vesting affect the amount I should contribute for retirement?
You should aim to contribute between 10% to 15% of your income toward retirement. This percentage can include the employer’s contribution. You should aim to contribute as much as your employer if the 10% to 15% range exceeds your ability. The employer contribution is essentially free money.
Maybe…
You may want to increase your contributions to cover the loss if you change jobs knowing that you will leave your job before your 401(k) account becomes fully vested.
Should I take advantage of the employer match even if I plan to leave?
There’s never any harm in enrolling and taking advantage of the employer match, even if you do not plan to stay in your job long enough to become fully vested in your 401(k) account. You may end up staying in your job longer than you originally planned, and you might be able to keep some of that money for your retirement.
And remember: when it comes to retirement, it’s always better to save more rather than less. Your future self will thank you.
Frequently Asked Questions (FAQs)
Who regulates vesting in a 401(k) plan?
Employers can set most details of 401(k) plans according to their desires, but there are some minimum standards that are enforced under the Employee Retirement Income Security Act of 1974 (ERISA) by the U.S. Department of Labor. ERISA requires that employees receive the most important plan information in writing, and vesting schedules would qualify as important plan information.
What is a vesting schedule?
A vesting schedule describes what an employee must do to become fully vested. This guidance allows employees to know how long it will take them to become fully vested in their 401(k) accounts. If employees become more vested in their 401(k) accounts over time rather than becoming fully vested all at once, the vesting schedule will outline this gradual progress toward becoming fully vested.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and ensure the accuracy, reliability, and credibility of our content.
Internal Revenue Service. “Retirement Topics – Vested Benefits.”
U.S. Department of Labor. “Plan Information.”
Source: https://www.thebalancemoney.com/what-does-it-mean-to-be-vested-in-my-401-k-2385773
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