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How Long Does it Take to Vest in a 401(k) Plan?

Emily Brandon

Employer contributions to a 401(k) plan can help you build wealth for retirement faster. But you don't always get to keep your 401(k) match or other company contributions when you leave a job. Some employers have vesting schedules that require a specific number of years on the job before you are entitled to keep any of the company contributions to the 401(k) plan. Other firms allow employees to keep a gradually increasing fraction of the 401(k) match based on years of job tenure. Here's a look at how long you might need to stay on the job to benefit from a 401(k) match.

[See: How to Max Out Your 401(k) in 2017.]

Immediate vesting. Just under half (47 percent) of 401(k) plans provide immediate vesting of employer matching contributions, according to a Vanguard analysis of 1,900 qualified plans with more than 3.9 million participants. This arrangement tends to be beneficial to short-term employees because the company contributions can be saved for retirement regardless of how long the employee chooses to remain with that employer. When you leave the company you can continue to defer paying taxes on your account balance by leaving it in the 401(k) or rolling it over to an IRA or a new employer's 401(k) plan.

Cliff vesting schedules. Some companies don't allow workers to keep employer contributions to the 401(k) plan until they have been employed by the company for a specific period of time, typically two or three years. Workers who leave before meeting the job tenure requirement don't get to take the 401(k) match with them when they leave the job. "It's a program to incentivize employees to stay," says Kelly Luethje, a certified financial planner for Willow Planning Group in Boston, Massachusetts. "Lots of times you have to be at your job for three years and then you get a whole lump sum."

For example, a worker who saves $5,000 per year and receives a 50 cent match for each dollar saved would have $15,000 in his 401(k) account after two years, not including any investment gains or losses. If he receives a better job offer and leaves the company, the amount he gets to keep depends on the 401(k) plan's vesting schedule. If the 401(k) plan has a three-year cliff vesting schedule, a worker who leaves after two years would only get to keep the $10,000 he personally contributed and any investment gains that money accrued. The entire $5,000 401(k) match would be forfeited. "With a cliff, they are giving you nothing if you leave too soon, so there is a lot of money being left on the table," says John Pak, a certified financial planner and founder of Otium Advisory Group in Los Angeles.

[See: 9 Ways to Avoid 401(k) Fees and Penalties.]

Graded vesting schedules. Some companies have graded vesting schedules that allow employees to keep a gradually increasing portion of their 401(k) match when they leave the job based on their years of service. However, workers typically don't get to keep all of the 401(k) match unless they stay with the employer for five or six years, Vanguard found. "Common graded vesting schedules on contributions from the employer such as a match or profit-sharing contribution are 20 percent per year over five years and 25 percent per year over four years," says Catherine Golladay, senior vice president for 401(k) participant services and administration at Schwab Retirement Plan Services.

Let's say a 401(k) plan has a five-year graded vesting schedule in which employees get to keep 20 percent of the employer's contributions for each year of service until they are fully vested by spending five years at the company. A worker who saves $10,000, gets a $5,000 401(k) match and then leaves after two years will only get to keep $2,000, or 40 percent, of the employer contributions provided. "If you stick around for about four years, you have about 80 percent of the opportunity, but you are still leaving 20 percent behind," Pak says. "If you are leaving your job every two to four years, you are leaving the possibility of 40 to 60 percent of unvested free money on the table."

[See: How to Save $1 Million by Retirement.]

Deciding whether to leave. If you are close to becoming vested in a 401(k) account, sticking with a job for a few extra weeks or months could be worth thousands of dollars. However, if the new job opportunity is too good to pass up, factor in the amount you are leaving behind when considering your new compensation and benefit package. Pointing out that you would lose $5,000 in retirement benefits in order to take the new job might help you to negotiate a better salary or signing bonus. "It can be a cost-benefit analysis with the number of what you are gaining in comparison to what you are giving up," Luethje says. "If the new job is what you want to do in your career or it makes sense for your family or your life goals, but you are leaving some money, I would definitely think about that as something you can negotiate with your new employer."

Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."



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