What to Know About 401(k) Vesting When Changing Jobs

Highlights:

• In an employer-sponsored retirement plan like a 401(k), vesting refers to the percentage of contributions that the accountholder owns outright.
• Contributions that you make to your own 401(k) are always 100% vested.
• 401(k) vesting schedules for matching contributions made by an employer may vary from company to company. However, most employer contributions are vested according to how long you've worked for the company.

If you've built your retirement wealth with an employer-sponsored 401(k) plan, you'll want to protect every dollar you've saved. But when you get a new job, you may risk leaving some of your retirement savings behind. The vesting schedule for your current 401(k) plan can determine just how much money follows you to your new employer.

What is 401(k) vesting?

A 401(k) is a tax-advantaged, employer-sponsored retirement plan funded by contributions from both the employee and their employer. Vesting refers to the percentage of these contributions that you, the accountholder, own outright.

Your employer can never take back your vested funds. However, if any portion of your 401(k) balance is not vested, your employer may reclaim this money under certain circumstances — for instance, when your employment status changes.

How does 401(k) vesting work?

Any contributions you make to your 401(k) are automatically vested, so you have full ownership of these funds. Contributions made by your employer — such as those made through a matching program — are not automatically vested.

401(k) vesting schedules may vary from company to company. However, most employer contributions are vested according to how long you've worked for the company. Therefore, a newly hired employee may not have total ownership of matching contributions made by their employer for several years. Your employer's contributions do not belong to you in total until your 401(k) is 100% vested. Once you reach this point, the funds in the account remain yours, even if you find a new job.

Be sure to consult your employer to learn more about their vesting schedule and other 401(k) policies.

Types of 401(k) vesting

Employers have varying processes for fully vesting your retirement funds. However, you can generally expect your 401(k) to follow one of several types of vesting schedules.

• Immediate vesting grants an employee 100% ownership of their employer's contributions right away.
• Graded vesting grants an employee ownership of their employer's contributions in regular increments over time. For example, say a company's vesting schedule is spread over six years. Employees might become vested in 20% of their employer's matching contributions after two years, 60% after four years and 100% after six years. Employers may choose this type of vesting schedule to encourage employees to stay with their company on a long-term basis.
• Cliff vesting grants an employee full ownership of the employer's contributions on a specified date. For example, a company may have a waiting period of three years before an employee becomes vested in the employer's contributions all at once. The employee is fully vested only when they reach the end of this cliff period — before that time, they are 0% vested.

What to do with a 401(k) account after you leave a job

If you're expecting a big career move and you have a 401(k) with your current employer, your plan's vesting schedule can help you time your departure. If you're not yet 100% vested, leaving your job now may cause you to forfeit a portion of your funds. Postponing your resignation until you're fully vested allows you to bring 100% of your 401(k) savings with you when you go. Check your account statements and reach out to an HR professional or benefits administrator for details, including your specific vesting dates.

Before you leave your job, consider the various ways you can transfer any vested funds. You might:

• Do nothing. If your 401(k) balance is large enough — typically greater than $5,000 — you can keep your account with your former employer. This is one way to allow your funds to continue to grow over time.
• Cash out. You can withdraw your funds in a lump-sum distribution. However, the tax consequences of this choice are likely to be costly. You'll also lose the potential for additional growth.
• Open a rollover IRA. If your new employer doesn't offer a 401(k) plan or other retirement savings options, you might roll your funds into an individually sponsored IRA.
• Move your funds into a new 401(k). You can also generally complete a direct transfer of funds to a new 401(k) account sponsored by your new employer.

Don't rush to take action regarding a 401(k) plan before considering the consequences to your retirement savings. With preparation and planning, you can make important career moves without leaving money on the table.