Vesting in your 401(k) plan means that you own it. While you already own the amount you personally deposit in your 401(k) plan, you don’t own your employer’s contributions to the account until you vest in the 401(k) plan.
Depending on your 401(k) plan’s specific rules, employees with similar work and savings histories might leave a job with significantly different retirement account balances. For example, let’s say an employee contributes $6,000 to his 401(k) plan over two years on the job and receives $3,000 in employer matching contributions, but then decides to change jobs. If his current employer provides immediate vesting, he can roll the entire $9,000 over to an individual retirement account. If his 401(k) plan has a three-year cliff vesting schedule, he has not stayed at his company long enough to qualify for any of the 401(k) match, and leaves the job with only the $6,000 he contributed to the plan. If his employer has a graded vesting schedule that says he gets to keep 20 percent of employer 401(k) contributions for each year of service until he fully vests at five years of job tenure, he will qualify to keep 40 percent of the 401(k) match, or $1,200, and can roll $7,200 over to his IRA.
Vesting schedules vary considerably among different 401(k) plans, so it’s important to find out the vesting requirements for your account. “Ask your HR manager or 401(k) administrator about your company’s vesting schedule if you don’t know,” Hubble says. “The good thing is that even though you may not be eligible to roll over those funds until you meet the vesting requirements, you are still able to direct how those funds are invested and they will continue to grow alongside your contributions as long as you work for that company.”
[See: 10 Tips for Rolling Over a 401(k) When You Change Jobs.]
Should you stay at a job until you are vested in the 401(k) plan? Leaving a job before you are vested in the 401(k) plan could cause you to miss out on thousands of dollars in retirement savings. If you are close to the cutoff for being vested in your 401(k) plan, sticking around for a few extra weeks or months could give your nest egg a significant boost. “If you have, say, a month left before being fully vested, you may think about staying to take access of those matching funds,” Sensing says. “On the flip side, if you are truly unhappy at your job or it is time sensitive that you begin working at your next position, it may be worth it to you to leave some money on the table.”