Hey savvy savers!
Emma here, back with another dose of financial wisdom. Today, I’m diving deep into a term that floats around a lot with 401(k)s: vesting. Unfortunately, it’s not about thrifting a quirky vest with your friends (but I’m free Saturday if that sounds fun to anyone else). Vesting, in the 401(k) world, plays the role of determining when you officially “own” your retirement fund.
What Is Vesting?
Vesting refers to the amount of time you need to be with your employer before you “own” or have the full right to the employer contributions made to your 401(k) account. Now, you always have 100% ownership of the funds you contribute from your paycheck. The schedule comes into play with the additional funds your employer might toss into the mix.
Types of Vesting Schedules
- Immediate: You own 100% of your employer’s contributions as soon as they hit your account. So, if you decide to leave the company, you can take all of those contributions with you. Cha-ching!
- Graded: Here’s where patience pays off. With graded vesting, a specific percentage of your employer’s contributions becomes vested with each year of service. For example, after year one, you might be 20% vested, meaning you own 20% of your employer’s contributions. This percentage typically increases each year until you reach 100% vesting.
- Cliff: With cliff vesting, you’ll have to work for the company for a specific period (often around 3 years) before you’re 100% vested. If you leave before this period, you might forfeit all employer contributions. But once you’ve reached the “cliff”, you’re fully vested.
Why It Matters
Vesting is an incentive. Companies want talented employees (like us) to stick around. Offering a 401(k) match is attractive, but they might not want to hand over all those funds immediately if there’s a change you might leave early. The vesting schedule ensures that you’re rewarded the longer you stay.
Navigating Your Vesting Schedule
First things first: check your 401(k) plan details or chat with HR. Know where you stand. If you’re considering a job change and you’re close to being fully vested, it might be worth waiting a bit, so you don’t leave money behind.
Saveday has been a lifesaver for working through nitty gritty details like these. Find out more tips and tricks with their blog here.
Until next time!