The popular 401k retirement plan often includes a vesting period, but what exactly is “vesting,” and how does it work?
An April 2014 study conducted by the American Benefits Council showed that of those who work at companies with 500 or more employees, 89% had access to a company-sponsored retirement plan like a 401k. And, 90% of employees were shown to be actively participating in the retirement plan with an average of 6.8% of pre-tax earnings being allocated to a 401k or IRA.
Employees seem to be more invested than ever in their financial futures, as statistics show participation is growing each year. The combined balance of defined contribution plans and IRAs in the U.S. came in at a staggering $11 trillion in 2013. Americans are saving for retirement, and many can rattle off the percentage they’re saving, the employer’s contribution rate, and other key terms, but most individuals have no idea what it means to be fully vested in a 401k. Let’s take a look at “vesting” and what it means to you.
What does “vesting” mean?
Vesting is a financial term meaning ownership. Simply put, if you contribute money to a 401k plan or other defined contribution investment plan, you likely receive some kind of match or employer contribution. This match is what makes the 401k such a lucrative and popular option for employees today. But the money you receive as a “match” from the company may not be yours to keep right away. Your plan may require a vesting period before you can claim total ownership of the funds. Of course, any funds you invest directly are always vested on day one – it’s your money after all!
What are the three common vesting schedules?
By reading through the fine print on your 401k agreement, you will find the vesting schedule for your particular investment plan. There are three basic vesting options: full or immediate vesting, cliff vesting, or graded vesting.
Full or Immediate Vesting: Quite simply, any monies in your retirement plan are yours to keep, regardless of how long you choose to stay with the company or participate in the company-sponsored retirement plan. 401k plans may have a “Safe Harbor Match,” which means any contributions made by the company are immediately vested and yours to keep.
Cliff Vesting: Imagine this vesting option using the following analogy: if you walk off the edge of a cliff, you’re going to keep on going and you can’t come back. This relates to the idea that once you hit a certain “years of service” milestone with a company, you are then vested in the retirement plan and all contributions are yours to keep – regardless of what you do from then on out.
Graded Vesting: This concept is also based on service milestones; yet instead of going from 0% to 100% vested on a specific date, a graded vesting model allows an employee to keep a portion of the money contributed by the company for each year worked, eventually leading to a 100% vested status.
While employees tend to pay little attention to retirement plan vesting schedules, it does pay to understand how yours works so you don’t inadvertently leave money on the table. If you are just about to vest fully in a large sum of money in the form of a company match, now isn’t the time to change jobs. Waiting just a month or two could mean the difference between thousands of dollars in your 401k.
If you are considering changing jobs because of a new opportunity on the horizon with a different firm, and a slightly higher base salary is offered, think about how long you’ll have to wait to vest fully in the new company’s 401k program. Understanding vesting schedules and other key components of your 401k can help you maximize your retirement plan and save as much money as possible for the future.
On the other hand, if you are looking to roll over a 401(K) to physical gold or silver contact American Bullion. They can help set up the new Gold IRA and handle all the details for you.
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