If your retirement strategy includes a 401(k), you need to understand the specifics of your plan’s vesting schedule. If you leave your current job to pursue new career opportunities, you still have the right to access your 401(k). However, the vesting schedule may sway your decision based on the potential for a reduction of or loss of part of your 401(k) balance.
You have some options when deciding how to handle your existing or previous 401(k) plans. An employee can borrow against the retirement fund, cash it out, convert it to an IRA, or take the 401(k) to the new job. However, sometimes when people change jobs and take their 401(k) with them, they’re surprised to find that the vested balance of their 401(k)—the amount available to departing employees when they decide to leave a company—is not what they expected.
Vesting refers to the ownership of the contributions made into a 401(k) by an employer. Your contributions are always 100% vested, but the vested balance from your employer’s contributions depends on the amount of time you were employed by the same company. When you are fully vested, you have the right to keep the employer’s contributions whether you willfully leave or your employer terminates you.
Graded vesting and cliff vesting
With graded vesting, the employee becomes vested over time, on specific anniversary dates of employment. The percentage gradually increases the longer one is employed with the same company. Employees begin to become vested in at least 20 percent of their accrued benefits after a specific time of employment, with 20 percent increases each year until the employee is 100 percent vested. Once an employee hits 100 percent vested, he or she possesses irrevocable rights to the employer contributions.
Cliff vesting is not a gradual percentage increase—it is a sudden dive off the cliff to 100 percent vested. The employer’s contributions become the property of the employee at a specific date after employment. Employees are subject to a required waiting period; after satisfying this waiting period, employees become fully vested all at once.
Employers make the decision about which type of vesting schedule to offer, and the employee’s individual fund balances are dependent on the health of the financial market, but education is still important. If employees are aware of their finances, they can make better decisions about the timing of their career path. Some employees may find they will benefit from staying with the same employer until they are fully vested and have access to the maximum amount of funds they have earned.
Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance advisors to educate young adults on the importance of saving.