401(k) Vesting

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on August 10, 2023

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Vesting refers to the type of ownership your employer plan has in the money you contribute.

401(k) plans are "vested", which means that employer contributions belong to the employee immediately, while the employee's own contributions generally belong to the employee only after a vesting period.

Many companies' policies require employees to be fully vested immediately.

Other employers have a graded vesting schedule, in which the money you contribute is subject to different degrees of vesting based on tenure with the company.

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Why Do Employers Use Vesting?

The main reason 401(k) plans use vesting is to provide an incentive for employees to stay with the company for a specific amount of time.

Employers want employees who remain with the company long term, and vesting is a way to reward those who do.

Another reason 401(k) plans use vesting is to encourage contributions.

For example, if employees know they can keep 100% of employer match dollars after four years with the company, it might help motivate them to contribute more than 3% or 5%.

In addition, 401(k) plans are allowed to use vesting to prevent abuse. This means that plans can have vesting for contributions because the employee has full control of their account.

Keep in mind that retirement plans are designed to help employees save for retirement, so if employers did not have some kind of an ownership structure, employees might be tempted to take 401(k) money out for other uses.

How 401(k) Vesting Works

Typically 401(k) plans work like this: You start with a 401(k) plan, where your contributions are not vested.

In other words, you don't necessarily own them; they belong to the employer until you leave employment or become fully vested.

After two years (or whatever is specified by the plan), you reach "proportionate" vesting.

This means that you own a portion of your contributions, while the employer remains an owner until you reach 100% vesting.

After four more years (or whatever is specified in the plan), employees become fully vested in their 401(k) contributions.

How Do I Know if I Am Fully Vested in My 401(k)?

Your plan administrator will be able to tell you how much of your contributions are vested and how much you have to work before you can access those funds.

Vesting schedule outlines when you obtain ownership of 401(k) contributions.

Many plans also provide information about your total account balance, including employer contributions and employee contributions that are vested or partially vested.

You should receive this information every year in the plan's annual statement, which you can access online or by paper if requested.

Immediate Vesting

Immediate vesting is the simplest form of 401(k) vesting that a plan can offer.

This occurs when all employer contributions become 100% vested as soon as they are made available to the employee.

If you quit before you have been with the company for a full year, you would still own all the 401(k) dollars you contributed.

Graded Vesting

This vesting schedule allows you to own contributions in different percentages depending on how long you have been with the company.

For example, contributions might be 20% vested after one year, an additional 30% after two years and the final 50% after three years.

Cliff Vesting

In this vesting schedule, you are entitled to basically none of your match or profit-sharing dollars until you work more than a certain number of years with the company.

For example, if you have to work five years before vesting or employer contributions become available, 401(k) dollars are essentially locked up for the first year.

How to Find Your 401(k) Vesting Schedule

You can typically find vesting schedules in the Summary Plan Description (SPD), which is a document that 401(k) plans are required to make available to plan participants.

The SPD will outline all of the plan's rules, including vesting. You can request a copy from your plan administrator or download it from the company website.

You will see "vesting schedule" in the left side toolbar when searching for your 401(k).

What Happens If I Leave Before I Am Fully Vested in My 401(k)?

If you leave your 401(k) plan before becoming fully vested, the employee contributions become available to you immediately.

You will start receiving employer contributions when they are vested or following a schedule that is outlined in your plan document.

How Does Vesting Affect How Much I Should Contribute to Retirement?

Vesting means that each time an employee stays with an employer for a year, he or she is allowed to keep a portion of contributions.

The number of years the employee stays with an employer affects how much he or she can keep from contributions, and this is expressed as a percentage known as one's "vesting percentage."

If your 401(k) plan is generous enough, you might decide to contribute as much as you can afford even if it's not fully vested.

That way, once you hit the vesting amount, you will have a nice nest egg for retirement.

Final Thoughts

Your 401(k) plan should offer some form of the vesting schedule.

It's important to know what the rules are so you can make an informed decision about how much to contribute to your 401(k).

Once you understand your contribution schedule, it might be easier for you to start saving for retirement as early as possible.

401(k) Vesting FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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