That 401(k) Match May Not Be Yours Yet – Here’s Why


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Most employers offer some kind of matching contribution or profit sharing to their 401(k) employee savings plans, but what workers may not know is that these funds do not belong to them. when an employer files them.

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Employer contributions have a “vesting” schedule, as do some investment accounts. This means a waiting period of one to six years before the amount becomes the employee’s.

Many companies will use vesting schedules to ensure that employees don’t walk away with the money quickly and to 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 lose the money and any growth on that money while you were there.

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

There are generally two types of vesting schedules that employers use – cliff and graduated.

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

Gradual vesting schedules are gradual increases in ownership until fully vesting. A five-year gradual vesting schedule could be an additional 20% each year until year 5, when full ownership is perceived.

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 are doing with their 401(k) plans to affect attrition. Immediate vesting is rare, but could help retain weary workers who have more options now than two years ago. Competition for workers has intensified and companies have issued incentives such as wage increases and freebies to try to attract new talent in historically tight labor markets.

On the other hand, we might see cliff acquiring becoming less common, as workers don’t have as much incentive to stay with a company as they once did, and might find those 401(k) schedules a disadvantage instead of a benefit offered by an employer.

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Tiered schedules are something of a middle ground between the two – employees can still own a portion of their employer contribution even if they decide to leave a position before it’s fully vested. This style schedule is also more in line with current work trends where employees are ready to quit their jobs more easily 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 banking and investment research. Georgina has written for Investopedia and WallStreetMojo.

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