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Understanding 401(k) Vesting Schedules
44% of Plans Offer a ‘Rare’ Advantage
Companies use different timelines, or vesting schedules, to determine how long it takes for savers to fully own the employer contributions.
In some cases, they must work at a company at least six years before the funds are theirs. They risk forfeiting some of the money — and investment earnings — if they walk away early.
A worker retains complete ownership of their match when it is 100% vested. (One important note: An employee always fully owns their own contributions.)
More than 44% of 401(k) plans offer immediate full vesting of a company match, according to the PSCA survey. This means the worker owns the whole match right away — the best outcome for savers. That share is up from 40.6% in 2012.
For the Rest, Vesting Timelines May Vary
The rest, 56% of 401(k) plans, use either a “cliff” or “graded” schedule to determine the timeline.
Cliff vesting grants ownership in full after a specific point. For example, a saver whose 401(k) uses a three-year cliff vesting fully owns the company match after three years of service. However, they get nothing before then.
Graded schedules phase in ownership gradually, at set intervals. A saver with a five-year graded schedule owns 20% after year one, 40% after year two, and so on until reaching 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 earnings on the match.
Federal rules require full vesting within six years.
Almost a third, 30%, of 401(k) plans use a graded five- or six-year schedule for their company match, according to the PSCA survey. This formula is most common among small and midsize companies.
Vesting schedules tend to be a function of company culture and the philosophy of executives overseeing the retirement plan, Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, based in Pearl River, New York, previously told AsumeTech.
Further, there are instances in which a worker may become 100% vested regardless of the length of their tenure.
For example, the tax code requires full vesting once a worker hits “normal retirement age,” as stipulated by the 401(k) plan. (For some companies, that may be age 65 or earlier.)
Some plans also offer full vesting in the case of death or disability.
401(k) plans are a popular way for workers to save for retirement. Many companies offer matching contributions to help workers build their nest eggs.
However, there is often confusion around 401(k) vesting schedules. A vesting schedule is the timeline in which a worker becomes fully entitled to their employer’s contributions to their retirement savings plan. In this article, we aim to clarify some of this confusion regarding 401(k) vesting schedules.
Immediate Full Vesting: The Best Outcome for Savers
According to a PSCA survey, over 44% of 401(k) plans offer immediate full vesting of a company match. This means that the worker owns the employer’s entire contribution right away, which is the best outcome for savers.
For the remaining 56% of plans, vesting timelines may vary. Some may use a “cliff” vesting schedule which grants full ownership after a specific point in time, while others may use a “graded” vesting schedule which phases in ownership gradually at set intervals.
Federal Rules and Company Culture
Federal rules require full vesting within six years. However, some companies may offer a shorter vesting period. Vesting schedules tend to be a function of company culture and the philosophy of executives overseeing the retirement plan. Small and midsize companies are more likely to use a graded schedule.
It’s important to note that certain circumstances may result in full vesting regardless of the length of employment. For example, reaching “normal retirement age” as stipulated by the 401(k) plan, or in the case of death or disability.
Understanding your 401(k) vesting schedule is critical to maximizing your retirement savings. Be sure to ask your employer or plan administrator about your vesting schedule and how it impacts your retirement savings.
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