Why Your 401(k) May Not Be 100% Yours

401(k) Vesting Schedule

A 401(k) match is one of those things that sounds almost too good to be true.

You contribute to your 401(k) and your employer immediately matches 50%-100% of the contribution. That’s an immediate 50%-100% return on investment, which is better than you’ll get from the stock market, from paying off credit cards, or just about anything else.

That immediate return on investment is why, in The New Family Financial Road Map, I recommend taking full advantage of your 401(k) match before paying off debt or investing anywhere else.

It’s a fantastic deal. But there’s a catch.

In some cases that employer match may not actually be yours until you’ve been with your company for a certain amount of time. It all has to do with this weird thing called 401(k) vesting, and in this article I’ll explain what it is and how to calculate the amount of your 401(k) that’s truly your money.

Quick note: This article is focused on 401(k)s, but pension plans and other defined benefit retirement plans are often subject to vesting as well.

What is 401(k) vesting?

When your employer contributes money to your 401(k), that contribution immediately shows up in your account balance. But that doesn’t mean that it’s immediately your money.

Some employers have what’s called a 401(k) vesting schedule, which simply means that you have to stay with the company for a certain amount of time before the money that they’ve contributed to your 401(k) becomes yours.

Here’s an example of what a 401(k) vesting schedule might look like:

401(k) vesting schedule example

In this example, if you leave your company after less than 1 year, you won’t get any of the money in your 401(k) that’s attributed to employer contributions. That includes both the initial contributions AND any growth (or loss) that it’s experienced over that period.

Once you’ve been there for 1 year, 25% of that employer contribution is yours. After 2 years it’s 50%, after 3 years it’s 75%, and once you’ve worked there for 4 years, 100% of your 401(k) is yours whether you stay or leave.

It’s worth noting that ALL employer contributions are subject to the exact same vesting schedule, no matter when they were made. In other words, you don’t have to wait 4 years for each individual contribution. In the example above, ALL employer contributions are 100% yours once you’ve been with the company for 4 years, whether they were made your first day on the job or just last month.

There are all different kinds of vesting schedules, so it’s very likely that yours is different than the example here. Down below I’ll show you how to find your company’s 401(k) vesting schedule and calculate your vested balance.

The difference between employER contributions and employEE contributions

Before you freak out and stop contributing to your 401(k), there’s an important distinction to make here between contributions YOU make to your 401(k) and contributions your employer makes.

Money YOU contribute to your 401(k) is 100% yours at all times. No vesting schedule ever applies to your 401(k) contributions, and you are free to take all of it with you when you leave the company, no matter how long you’ve been working with there.

It’s only your employer’s contributions to your 401(k) that are subject to vesting. So if your employer offers a matching contribution or otherwise contributes money to your account, that money may not be 100% yours right away.

To sum it up:

  1. Money YOU contribute to your 401(k) is ALWAYS 100% yours
  2. Money your EMPLOYER contributes to your 401(k) may be subject to a vesting schedule

How to figure out whether you’re 100% vested

So, how do you find out whether your company has a 401(k) vesting schedule? And if it does, how do you figure out how much of your 401(k) has vested?

Here’s how I do it for clients.

1. Find your 401(k) vesting schedule

Ask your employer or HR representative for your 401(k)’s Summary Plan Description. This is a long, detailed document that explains all the ins and outs of your plan, and while it’s a lot to look through it’s also full of useful information.

For your purposes here, you can skip right to the section on Vesting to find your 401(k) vesting schedule. If you’re lucky, you may even find out that all employer contributions are 100% vested right away!

2. Find your employment start date

You can also ask your employer or HR representative for your official start date with the company. This will allow you to figure out exactly how many years you’ve been there so far.

3. Determine your current vested percentage

Using the two pieces of information you collected above, you can figure out both your current vested percentage AND the date on which you will be 100% vested.

For example, let’s say that you have the same 401(k) vesting schedule as the example above and that your official start date was 8/1/2014.

Since today is 10/25/2016, that means that:

  1. You’ve been with the company for just over 2 years and are therefore 50% vested in your employer contributions.
  2. You will be 100% vested in your employer contributions on 8/1/2018.

If you’re already 100% vested, you can stop now and rest easy knowing that your entire 401(k) balance is yours. If not, you can move on to the next step.

4. Find your 401(k) balance attributed to employer contributions

Log in to your 401(k) or use a recent 401(k) statement and look for the balance attributed to employer contributions. It may also be labeled as employer match or something else, so you may have to do a little digging.

When in doubt, don’t hesitate to ask your employer or HR representative for clarification.

5. Calculate your vested balance

Multiply the balance attributed to employer contributions by the current vested percentage you found in Step 3. The result is the amount of money that is currently yours no matter what, in addition to all the money attributable to your own contributions.

Sticking with the example from above, let’s say that you have a total of $30,000 in your 401(k), with $10,000 of that attributable to employer contributions.

Given that you’re currently 50% vested, $5,000 of that employer contribution is yours no matter what. Add in your contributions and you have a total vested balance of $25,000.

What should you do if you’re not 100% vested?

There are two big implications to your company’s 401(k) vesting schedule, and we’ll talk quickly about each of them here.

1. Re-evaluating your employer match

Rule #1 in investing is start by taking full advantage of your 401(k) employer match. I’ve said it myself and I’m hardly alone.

The reason is that it’s a fantastic return on investment. A 50% match is like an immediate 50% return on investment, and that’s tough to beat!

But if you’re a new employee and your company has a long 401(k) vesting schedule, it’s worth giving this advice a second look. Especially if you don’t think you’ll be with this particular company for very long AND your 401(k) is burdened with high fees that you could avoid by investing elsewhere.

Going back to the example above, a 50% match is really a 0% return on investment if you stay with the company for less than 1 year. If you stay more than 1 year but less than 2, it’s a 12.5% return on investment. That’s still high, but it’s not quite the slam dunk it appears to be at first.

This isn’t to say that a long 401(k) vesting schedule means you should turn down your employer match. In most cases it’s still a fantastic deal, but there are some situations in which it may not be quite as valuable as it seems.

2. Deciding when to change jobs

Let’s say that you want to change jobs but you’re not 100% vested yet. What should you do?

If your current situation is tolerable and you’re close to an anniversary that would increase your vested balance, it might be worth waiting to get there.

But every situation is different and it may not be worth putting your life on hold just to vest a little more. Here are some things to consider when making the decision:

  1. How much money would you actually gain from waiting? Not in percentages, but in actual dollars. You can use the steps above to calculate the exact amount.
  2. If there’s a specific job you’d like to take, can you find out the details of their 401(k) plan? If it’s generous in terms of matching and vesting, you may be able to make up the difference.
  3. Run the numbers. Use this calculator to compare the amount you’d have to save per month for retirement if you left now to the amount you’d have to save if you waited for that vesting anniversary. Is it a significant difference? Could you make it up if needed?
  4. How unhappy are you in your current situation? Or how good of an opportunity do you have elsewhere? While you don’t want to unnecessarily throw money away, in the end your quality of life matters more than anything else.

InVEST wisely

Get it? InVEST wisely? Okay, yeah, bad joke. I’m a dad. What can I say?

In all seriousness though, understanding your 401(k) vesting schedule will help you make smarter decisions about where to invest your money. In many cases it will still make sense to take the match first, but in others it may make sense to invest elsewhere.

Either way, this will give you a more accurate understanding of your current savings, which will make it easier to make better decisions going forward.

Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!

11 Comments... Read them below or add one of your own
  • Matt @ Optimize Your Life October 25, 2016

    My employer contributions are subject to a vesting schedule. I was aware of that going in, so it was never a major hang-up for me. The most frustrating part is that Mint doesn’t know the difference between the vested and non-vested parts, so it counts everything towards my net worth. It will be sad to see that drop off if I leave before I am fully vested.

    • Matt Becker October 25, 2016

      Yeah, I don’t know of an aggregation tool that factors in the vesting schedule. That would be a nice feature to add!

    • james turner August 12, 2017

      you can add a manual “debt” account named “401k unvested balance” to try to balance out your vesting. of course, then you have to manually update it. the advantage being that your net worth won’t have any sudden “drop offs” is you keep it reasonably current.

  • ExploreMountainsOnSkiFoot&Bike October 25, 2016

    This is an important detail of employer sponsored retirement programs. The couple of places I worked had a 3 or 5 year vesting period; it was not staged as you outlined. I stayed at one company long enough to secure the employer match, which was sweet. I do not know if I will stay at my current employer long enough for the match. Since the match is on the low side I am not worried. It is a topic I will bring up in my salary negotiation for my next job – By leaving my current employer prior to vesting, I am losing this much money, how about you provide me a signing bonus of that amount?

    I have a similar frustration to Matt. I find the quarterly statements from my employer sponsored retirement account annoying because it reports the total combined account value in large font at the top of the page. The actual vested value is buried in a table at the bottom of the page. I would rather the unvested position to be kind of hidden until I am actually vested.

    Since this is my first comment, I should say thanks for providing useful blog posts. I came across your site from JL Collins. Your strength is in distilling the important elements and explaining them well. Your blog posts on saving for college or not and paying off student loans are ones that I have referred friends and family to. Keep up the great work.

    • Matt Becker October 25, 2016

      I like that idea of using this as a negotiation tool for your next job. Very smart!

      And thanks for all the kind words! I can’t tell you how much that means to me. Thanks for reading and sharing and feel free to reach out any time if there’s anything I can do to help.

  • Financial Panther October 25, 2016

    This is something everyone should know about their employer sponsored retirement plans. My previous job didn’t have matching, so I never had to think about vesting before I left. Thankfully, my current job has immediate vesting, which is probably unusual. I had to confirm this with the benefits people however, because it wasn’t really clear anywhere when I tried to look it up and I was suspicious.

  • Karl October 25, 2016

    Fantastic explanation of vesting, Matt. I really liked how you tied it in to getting people to evaluate if the match is worth it if they aren’t planning to stay with their employer long-term.

    I agree with some of the prior comments that it gets frustrating not to have your un-vested portion more blatantly identified on your statements.

    I would suggest a couple of additional points to this article, if I may.

    Years of service for vesting can be a little more ambiguous than you described, so it’s important to read the Summary Plan Description carefully. My wife’s 401(k) plan has a five-year vesting schedule and only credits her with a year of service for vesting if she works 1,000 in a plan year. Her plan year ends 6/30. So if she had started in February, she may not have worked 1K hours by 6/30, so she’d need to calculate how long she’d worked there since 7/1 of her start year.

    I think it’s also worth adding a note about safe harbor provisions because they’re becoming more and more common. My current and former employers both utilize safe-harbor employer contributions, which is immediately vested. I was grateful because I was only with my prior employer for 3.5 years, so I was able to walk with all the match money.

    • Matt Becker October 26, 2016

      All good points Karl. Thanks for adding them!

  • Mathew October 26, 2016

    Another thing to look out for even after 100% vesting is when company matches into 401k. So some companies match with every pay Cheque contribution from the employee whereas some companies have moved to one time in the year. So if you leave your job on Dec 15 th and company 401k match is scheduled for Dec 16 th ( dates are hypothetical to illustrate) one can los the whole year contribution. So this needs to be a factor as well to determine when to leave for the new job.

    Thanks for the article.

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