What Does Vesting Mean and What Does it Have to With My 401(k)?

Written by , August 27, 2013

What Does Vesting Mean and What Does it Have to With My 401(k)Does your company offer a 401(k) retirement plan? If it does then it’s important that you take advantage of that retirement savings benefit in order to maximize your retirement nest egg. Many companies that offer 401(k)s also offer to match employee contributions, which can help you leverage your own contributions and retire with a larger nest egg. Employer matches are a way for companies to encourage retirement savings by their employees, and along with employer matches often comes the notion of “vesting.”

The concept of vesting means that the matching contributions an employer makes to your 401(k) are not yours right away; you only gain ownership of them over time.

Here is some additional retirement advice about vesting in the context of your 401(k).

  • The Basics of 401(k) Contributions. As you probably already know, a 401(k) is a type of retirement savings plan that many companies offer to their employees. It’s also commonly referred to as a defined contribution plan. You contribute a certain amount of funds from each of your paychecks into your retirement account, and decide how those funds are invested.
  • Your 401(k) Contributions are Always Yours. Unlike traditional pensions, the 401(k) contributions you make yourself are always yours, and you can take those funds to a new 401(k) if you find a new job, or roll your account over into an IRA.
  • Employer Matching Contributions. Some employers offer an additional benefit – they’ll “match” your 401(k) contributions by depositing additional money to your account based on your contributions.
  • A Cap on Employer Matching. Most employer matching programs contain a “cap” that limits the maximum amount the employer will deposit into your account in any given year.
  • Employer Matching Percentages. In addition, some employers match at less than a dollar-for-dollar basis. For example, a common employer match will be for the company to contribute $1 to your account for every $2 that you contribute.
  • Vesting of Employer Contributions. Because employer matching funds can represent a significant financial benefit, employers often use the concept of “vesting” as an employee retention technique. In many matching programs, the employee only gains ownership over the employer matching contributions over time.
  • Different Vesting Timeframes. Different employers use different vesting schedules and techniques for their contributions. For example, an employer’s contributions might only fully ‘vest” (that is, become fully owned by the employee) on a four-year schedule. This might mean that on each one year anniversary of the employer’s contributions, 25% of that contribution becomes vested in employee. Other employers employ a nonlinear vesting schedule, so that more of the employer contribution vests later in a given timeframe.
  • To find out what your company’s policies are regarding the 401(k) employer match, and any vesting schedule that might apply, check with your Human Resources department. The information will help you make career and financial decisions to protect your future and to maximize your retirement nest egg.

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