That 401(k) Match Might Not Be Yours to Keep Yet – Here’s Why

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Most employers offer some sort of matching contribution or profit-sharing contribution to their employee 401(k) savings plans, but what workers might not know is that those funds are not theirs the moment an employer deposits them. 

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Employer contributions have a “vesting” schedule just like some investment accounts. This means a waiting period from one to six years before the amount becomes the employees’. 

Many companies will employ vesting schedules to ensure employees do not walk away quickly with the money and incentivize workers to stay with the company by tying their performance to their investments. By choosing to leave an employer before the contributions are fully vested, you forfeit the money plus any growth on that money during the time you were there.

According to a survey from the Plan Sponsor Council of America, about 41% of 401(k) employer-sponsored plans offer immediate vesting throughout the country, CNBC reports.

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There are generally are two types of vesting schedules employers utilize — cliff and graded.

A cliff vesting schedule is a waiting period determined by the 401(k) where you have zero percent ownership and then a sudden immediate (like a cliff) full ownership of the money contributed. A company might have a 4-year cliff vesting schedule where the employee owns nothing of the employer contribution until year 4, where a person owns 100% of what has been contributed, according to CNBC.

Graded vesting schedules are gradual increases of ownership until full vesting. A five-year graded vesting schedule could be an additional 20% each year until year 5 when full ownership is seen.

As the employment landscape shifts and the Great Resignation takes full hold of the post-pandemic labor market, it will be interesting to see what employers do with their 401(k) plans to affect attrition. Immediate vesting is rare, but could help to retain weary workers who have more options now than they did two years ago. The competition for workers has increased, and companies have thrown incentives like increased wages and gifts to try and attract new talent in historically tight labor markets.

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On the other hand, we could see cliff vesting become less commonplace, as workers are not as incentivized to stay with one company as they were in the past, and could find those 401(k) schedules a downside instead of a perk offered by an employer.

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Graded schedules are somewhat of a happy medium between the two — employees can still own part of their employer contribution even if they decide to leave a position before they are fully vested. This style schedule is also more in line with current labor trends where employees are willing to leave their jobs more readily than in the past.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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