Thanks to ‘vesting’ schedules, it can take up to 6 years for workers to own their 401(k) match

Finance

Iparraguirre Recio | Moment | Getty Images

A 401(k) “match” from an employer is often referred to as “free” money, and therefore one of the best ways to juice retirement savings.

But there’s a catch — you may need to wait up to six years before it fully belongs to you.

A match is an employer contribution into a worker’s 401(k) account. The worker must contribute to the 401(k) plan to receive it. Employers generally match a worker’s contribution up to a certain percentage of the worker’s salary.

More from Personal Finance:
2 ways retirees can protect nest eggs during a stock market rout
Social Security for oldest and poorest at risk first in debt default
Guaranteed lifetime income gains appeal amid recession worries

About 81% of companies that offer a 401(k) plan made a matching contribution to workers’ retirement savings in 2021, according to the latest annual survey published by the Plan Sponsor Council of America, a trade group.

However, in most cases, workers don’t own this money right away due to “vesting” rules. (Vesting means ownership, in retirement parlance.)

44% of plans offer a ‘rare’ advantage

Companies use different timelines, or vesting schedules, to determine how long it takes for savers to fully own the employer contributions.

In some cases, they must work at a company at least six years before the funds are theirs. They risk forfeiting some of the money — and investment earnings — if they walk away early.

A worker retains complete ownership of their match when it is 100% vested. (One important note: An employee always fully owns their own contributions.)

More than 44% of 401(k) plans offer immediate full vesting of a company match, according to the PSCA survey. This means the worker owns the whole match right away — the best outcome for savers. That share is up from 40.6% in 2012.

For the rest, vesting timelines may vary

The rest, 56% of 401(k) plans, use either a “cliff” or “graded” schedule to determine the timeline.

Cliff vesting grants ownership in full after a specific point. For example, a saver whose 401(k) uses a three-year cliff vesting fully owns the company match after three years of service. However, they get nothing before then.

Graded schedules phase in ownership gradually, at set intervals. A saver with a five-year graded schedule owns 20% after year one, 40% after year two, and so on until reaching 100% after the fifth year.

For example, someone who gets 40% of a $5,000 match can walk away with $2,000 plus 40% of any investment earnings on the match.

Federal rules require full vesting within six years.

Almost a third, 30%, of 401(k) plans use a graded five- or six-year schedule for their company match, according to the PSCA survey. This formula is most common among small and midsize companies.

Vesting schedules tend to be a function of company culture and the philosophy of executives overseeing the retirement plan, Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, based in Pearl River, New York, previously told CNBC.

Further, there are instances in which a worker may become 100% vested regardless of the length of their tenure.

For example, the tax code requires full vesting once a worker hits “normal retirement age,” as stipulated by the 401(k) plan. (For some companies, that may be age 65 or earlier.)

Some plans also offer full vesting in the case of death or disability.

Products You May Like

Articles You May Like

Why Target and McDonald’s are cutting prices and offering deals
Dodge and Ram boss Tim Kuniskis, father of the Hellcat, to retire from Stellantis
Top Wall Street analysts like these 3 dividend stocks for high yields
Nvidia and 2 other portfolio stocks report earnings next week. Here’s what we want to see from each
Flying is cheaper in 2024. But not for some destinations

Leave a Reply

Your email address will not be published. Required fields are marked *