Is Your 401k Vested?
When I was 26, I moved back to the United States, after having lived and worked abroad as an English language teacher for 4 years. I was excited to be back in America, and finally start my first “Big Kid” job.
Within about a month of job searching, I was hired by a company that offered health insurance, paid time off, and a 401k match! Compared to my teaching position abroad, I felt like I was rolling in benefits.
As a personal finance nerd, I was pretty excited about my 401k. I opened my account as soon as I could, contributed enough to get the employer match (plus a little more) and I was excited about picking my funds.
Over the next 6 months, I loved watching the money start to add up, including my employer’s contributions. Free money!
But then I noticed that mixed in with all of the different contributions numbers and my account balance was this little line that said “vested balance”. The vested balance was less than my account balance, which didn’t make sense.
After some anxious Googling, I found out that sometimes employers “vest” your 401k account, making contributions on your behalf, but not allowing you access to them unless you’ve worked with the company for 2+ years.
I was floored.
What is vesting?
Vesting is a schedule for when you have access to the full account balance of your 401k.
To be clear, this is only applicable to your employer’s contributions. You always have access to your own contributions to your 401k. In other words, your contributions are 100% vested from Day 1.
However, if you quit your job before you are fully vested, you forfeit your employer’s contributions that are not vested. Meaning, your employer takes them back. They’re basically trying to buy your loyalty to the company.
Vesting Schedules
Graded
When I started with my company their vesting schedule looked like this:
Graded vesting gives you a percentage of contributions for every year you work at the company. The maximum graded vesting schedule is 6 years.
This is called a graded schedule, meaning you get it in portions. Simply, I had to work for the company for 2 years to keep any contributions to my 401k and at least 6 years to keep the full employer contributions to my 401k. Where was this info when HR was bragging about their 401k match?!
Cliff
Another type of vesting is cliff vesting. It looks like this:
Cliff vesting schedules give you no employer contributions at first, then all of the contributions at once. Maximum cliff schedule is 3 years until full contributions.
With cliff vesting, you get no contributions for a certain period of time (3 years or less) and then you receive the full amount all at once.
Immediate
Although this one isn’t very common, some companies immediately vest 100% of their contributions. Meaning, as soon as you open up your 401k and contribute enough for the employer match, the contributions are 100% yours.
What can I do if my company has a crummy vesting schedule?
First of all, that sucks. You could talk to your HR team and tell them you think 401k contributions from your employer should be immediately 100% vested.
Second, just because your employer has a vesting schedule does not mean you shouldn’t contribute to your 401k. I always recommend contributing enough to get the employer match, regardless of vesting schedule. Your own contributions are always yours, and saving for retirement is always a good idea.
Additionally, my employer actually ended up changing their vesting schedule when I’d been with the company for about 18 months, and they immediately vested all of their contributions. So even though I thought I would have to wait 6 years for 100% of those contributions (and no way was I going to stick around that long), I ended up getting them after less than 2 years. Maybe you’ll get lucky too.
Finally, if you’ve contributed at least your employer match to your 401k, open a Roth IRA. Generally, I prefer investing with IRAs instead of a 401k because IRAs have more investing options. Also, you always have control over the money because your account isn’t linked to your employer. So, contribute enough to your 401k for the employer match, then open an IRA for additional retirement savings.
If you’re not sure if an IRA is right for you, check out my blog: Traditional vs. Roth IRA.
Action steps
Open your 401k and contribute enough for the employer match. Regardless of vesting schedules, I recommend this.
You may have to dig into the fine print of your benefits package to figure out your vesting schedule (I did). When in doubt, contact your benefits coordinator in HR. They can tell you directly what the vesting schedule looks like for your company.
If you have a crummy vesting schedule, don’t despair! Keep making contributions at least for the employer match. After that, you can work on maxing out a Roth IRA.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
