This 401(k) Mistake Could Cost You Over $60K in Retirement Savings
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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Many workers with 401(k) plans risk losing thousands in retirement savings simply because they don’t understand how vesting works.
Roughly 44% of 401(k) plans offer immediate full vesting of a company match, according to a Plan Sponsor Council of America survey. That means that over half of all 401(k) plans use a vesting schedule, which means that employees gain ownership of employer matching contributions over a period set by their employer.
However, many employees are unaware of how their 401(k) plan works, including whether or not it has a vesting schedule. This lack of awareness can be costly — a new PensionBee analysis modeled the cost of incomplete vesting schedules on individual retirement savers and found that even partial 401(k) forfeitures can add up to over $61,000 in lost savings by retirement.
Here’s a closer look at what employees need to know about vesting schedules and how this can affect their career strategy.
Check Your Vesting Status Before You Switch Jobs
While the money you deposit into your retirement account belongs to you immediately, your employer’s contributions are a bit more complicated.
“They may be yours now, or they may become yours a little later,” said Romi Savova, CEO of PensionBee. “About half of employer contributions vest over time, which means if you leave your job too soon, you could forfeit some of that money, and the lost compound growth can make it even more costly.”
Employer 401(k) matching is essentially free money — but it’s only free if you walk away with it.
“Double-checking your status will ensure you’re not leaving money on the table when you switch jobs,” Savova said. “HR can share a copy of your summary plan description, a long document you got when you first started. Most provider websites also show your current vested balance, and your HR team can walk you through the details.”
When looking at your summary plan description, pay attention to whether or not you are in a plan with vesting, what kind of vesting schedule you are on — cliff or graded — and what proportion of your funds belong to you and when.
When Leaving a Job Could Cost You Thousands
If your 401(k) is on a vesting schedule, it’s worth taking this into account before switching jobs. This is especially important if your plan has a vesting cliff, where leaving before a vesting milestone means you get nothing.
“If you’re close to a vesting milestone, pushing your end date a few months can save you a lot of money,” Savova said. “Think of it in future terms — the amount you forfeit today would have grown to a substantially larger sum in 30 or 40 years. Of course, career decisions involve many factors, but vesting should always be weighed alongside salary and benefits when considering a move.”
Even with a graded vesting schedule, leaving partway through can add up to a big loss, she added.
Why Vesting Mistakes Are So Common — and Costly
The risks of not paying attention to your vesting schedule are “high — especially for job hoppers,” Savova said.
“Our data shows routine vesting forfeitures can add up to over $60,000 slipping away across your career,” she continued. “The tricky part is that while ignoring vesting schedules is an incredibly costly and common mistake, it’s also largely an invisible one.”
You may not notice the loss right away, or ever.
“That doesn’t stop the losses from quietly snowballing into real money missing from your retirement,” Savova said. “The frustrating part is that these are funds you are entitled to and are often marketed as such. Reading the fine print can help ensure they really do end up yours.”
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