Several factors contribute to job-switching decisions, including pay, advancement opportunities and benefits offerings. But even if you’re looking forward to generous retirement benefits with a new employer, you may need to tie up a few loose ends with your current job’s 401(k) plan.
That’s because many 401(k) plans have “vesting schedules” — timelines for when certain company matching contributions become fully yours. So before you leave your job, make sure you understand the concept and know what percentage of your savings is vested.
What’s yours to take
All contributions you’ve made through pretax salary deferrals to a 401(k) plan belong to you — regardless of whether you stay with the employer or leave. Funds subject to vesting are the matching contributions your employer might have made. For example, your current company may partially match up to 6% of your own contributions to a maximum of 3% of your annual salary.
Some companies allow matching funds to vest immediately, meaning the full account balance belongs to you if you leave. Such policies are common when employers are trying to hire in a tight job market because workers tend to prefer immediate vesting. But if your employer has a vesting schedule and some of the matching funds in your 401(k) account haven’t yet vested, you may be forfeiting the unvested portion if you leave
Types of schedules
In general, there are two types of vesting schedules:
Cliff. With these schedules, 401(k) plan participants become fully vested after a specific number of years (such as two or four). But if you leave your employer even one day before reaching that tenure, you'll likely forfeit all of your employer’s contributions.
Graded. Here, plan participants gradually earn ownership of their employer’s contributions. For example, your account might vest 25% per year over four years.
Note that if your employer has switched to a “traditional safe harbor” to make contributions to your 401(k) account, previous matching contributions and any new ones must vest immediately. However, employers may be able to limit vesting (for a maximum of two years) if they follow what’s called a Qualified Automatic Contribution Arrangement safe harbor.
Roll over or stay?
If you’re job-switching, you must do more than confirm your 401(k) plan’s vesting. Typically, participants can roll over a 401(k) account into an IRA plan or into their new employer’s retirement savings plan. You may also be able to keep your money where it is for now. Discuss the issue with your financial advisor.