Vesting schedules mean a 401(k) match can take years to own
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44% of plans offer a “rare” benefit
Companies use different time frames, or vesting schedules, to determine how long it takes savers to fully own employer contributions.
In some cases, they have to work in a company for at least six years before the funds are returned to them. They risk losing some of the money and investment income if they leave early.
A worker retains full ownership of their match when it is 100% vested. An important note: an employee always fully owns their own contributions.
According to the PSCA survey, more than 44% of 401(k) plans offer immediate full vesting of a business match. This means that the worker owns the entire game immediately, which is the best outcome for savers. This share is up from 40.6% in 2012.
For the rest, acquisition times may vary
The remaining 56% of 401(k) plans use an “abrupt” or “graded” schedule to determine timing.
Cliff acquisition grants full ownership after a specific point. For example, a saver whose 401(k) uses a three-year cliff vest fully owns the company match after three years of service. However, they get nothing before that.
Graduated schedules are installed gradually, at regular intervals. An investor with a five-year sliding scale holds 20% after the first year, 40% after the second year, and so on until it reaches 100% after the fifth year.
For example, someone who gets 40% of a $5,000 match can walk away with $2,000 plus 40% of any investment income on the match.
Federal rules require full vesting within six years.
According to the PSCA survey, nearly 30% of 401(k) plans use a graduated timeline of five or six years for their correspondence with the company. This formula is more common among small and medium-sized companies.
Vesting schedules tend to be a function of company culture and the philosophy of executives overseeing the pension plan, Ellen Lander, director and founder of Pearl River, New York-based Renaissance Benefit Advisors Group, said. previously told CNBC.
Additionally, there are instances in which a worker can become 100% vested regardless of their tenure.
For example, the tax code requires full vesting once a worker reaches “normal retirement age,” as the 401(k) plan states. For some companies, this may be age 65 or earlier.
Some plans also offer full vesting in the event of death or disability.