You may come across the term “vesting” while reviewing your retirement plan. Vesting refers to your ownership of certain contributions made to your account. Understanding how it works can help you make more informed decisions and better appreciate the benefits your employer provides.
What is vesting?
Vesting is the process by which you earn ownership of certain contributions to your retirement account. In a typical 401(k) there are two primary sources of contributions:
- Your own contributions from your paycheck
- Contributions made by your employer, such as matching or profit-sharing contributions
Your own contributions are always 100% vested immediately — every dollar you put in belongs to you right away. Employer contributions, however, may be subject to a vesting schedule.
Why do employers use vesting schedules?
Many employers use vesting schedules to encourage retention and reward long-term service. A schedule determines how much of your employer’s contributions you own based on how long you’ve worked there — the longer you stay, the greater your ownership.
How does vesting work?
There are several types of schedules, but the two most common are graded vesting and cliff vesting.
Graded vesting: ownership increases gradually over time.
An employer uses this schedule — 20% vested after 2 years, 40% after 3, 60% after 4, 80% after 5, and 100% after 6. If your employer contributed $10,000 and you leave after 4 years, you keep $6,000 (60%).
Cliff vesting: you become fully vested all at once after a specific service requirement.
An employer uses a three-year cliff schedule. Leave after two years and you may forfeit all unvested employer contributions; stay three years and you become 100% vested.
What happens if you leave your job?
When you leave, you generally keep:
- 100% of your own contributions
- 100% of the earnings on your own contributions
- The vested portion of any employer contributions
Any employer contributions that haven’t vested may be forfeited under the terms of the plan.
Say your 401(k) holds $20,000 from your own contributions and $8,000 from employer matching. If you’re 50% vested in the employer money when you leave, you keep the full $20,000 plus $4,000 of the match.
Does vesting affect investment growth?
No. Whether you’re fully or partially vested, the investments in your account still gain and lose value based on market performance. However, if unvested employer contributions are forfeited when you leave, any earnings tied to those amounts may be lost as well.
How can you find your vesting percentage?
Your vesting status is usually available through:
- Your retirement plan website or participant portal
- Account statements
- Your human resources department
- Your plan provider
If you’re considering a job change, checking your vesting percentage beforehand helps you understand how much of your account you’d keep.
The bottom line
Vesting determines when your employer’s contributions officially become yours. By understanding your plan’s rules, you can better appreciate the value of your benefits — and staying even a year or two longer could mean thousands of additional dollars. If you have questions about your schedule, contact one of our advisors.
This article is for general educational purposes only and is not tax, legal, or investment advice. Consider your own situation and consult a qualified professional before making decisions about your retirement account.