What is 401K Vesting

You just started a new job and one of the perks of the job is a 401k.  To make things even better your company also offers a match for your contributions.  Who doesn’t like “free” money for investing?

Before you get overly excited, let’s look at one aspect that may impact just how much of that “free” money you get to keep.  All the matching money and earnings from that money are subject to a vesting schedule.

Vesting means that you get to keep the matching money even if you are no longer employed by the company.  You typically are not vested right away; instead you vest either on a gradual scale or on a cliff.

Gradual Vesting – This is when you become vested a certain amount per year that you work for the company.  While the scale varies from company to company it must meet the following requirements:  20 percent vested after 2 years, 40 percent after 3 years, 60 percent after 4 years, 80 percent after 5 years, and 100 percent after 6 years.

Cliff Vesting – Instead of becoming vested a little bit each year cliff vesting allows you to become vested all at once at a specific number of years of service to the company.  This looks like: 100% vested in employer contributions at 3 years.

Other Valuable Information:

  • There are a couple exceptions to having to wait to be vested.  In the Simple 401K, and the Safe Harbor 401k you are immediately vested.  There are also some more detailed exceptions that can apply, so check your company policy for more specifics.
  • Your plan documents for your 401K will give you the specifics for your company.  You can get these on the website for your 401K or from your company retirement person.
  • The vesting only applies to the company contributions, not your own personal contributions.  You are automatically vested in both your own contributions and the earnings from your contributions.
  • What this does not guarantee – this does not promise that the dollars you put in or that your company matches will maintain their value.  You are still subject to market risk.
  • Vesting requirements and schedules may be different for other types of retirement programs, such as SIMPLE IRA, SEP and pension plans.
  • The requirements for vesting are actually set by Employee Retirement Income Security Act (ERISA).  You can find more detailed information at Employee Benefits Security Administration.
1 comment
Matt says February 21, 2012

My 403b is vested immediately. At least I think….haha…I’ll double check this week. Thanks.

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