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Is the Money in Your 401(k) Really Yours? How Vesting Works
Are you sitting down? Get ready to be shocked: Some of the money in your 401(k) program might not actually be yours. Donít worry, the money that you contributed is almost certainly and verifiably yours. However, the part that your employer puts in as a matching donation is another matter.

This is because you might not be vested. Knowing what vesting is and how it works at your company is a basic piece of financial literacy that no one with an employee-contributed 401(k) plan should be without.

What Is Vesting?

Vesting is a term used to describe full rights to a piece of property, generally. In the case of a 401(k) program with company-matching funds, it refers to the time period or monetary commitment that you must make until the matching donations in your 401(k) are wholly considered yours. Many employers put vestment clauses in their employee benefits plans to ensure that employees who are in it for the long haul are the ones enjoying employee benefits.

An Example of 401(k) Vesting

Vesting is often done in stages whereby you get X percentage of vestment after Y years and the full amount after Z years on the job. Letís say, for example, that you get $1,000 in matching funds to your 401(k) retirement plan every year, and 50 percent vests after two years, with the full amount after three.

If you quit after two years, youíre entitled to $1,000 of matching funds through vestment, as you would be getting half of two years worth of employer contributions or $2,000. If you quit after three years, you would be vested in $3,000 worth, because you are vested in 100 percent of employer contributions over the course of three years.

Vesting Variations

Some companies might have you contribute a certain amount on your own before you are vested. Other companies might vest you on an annual basis, meaning that the theoretical $1,000 annual contribution that we discussed above would be open to vestment starting with the year it was contributed. Thus, you would always be leaving some money on the table by leaving a job which vested employer-matching contributions in this way.

Employee Retirement Income Security Act

Unsurprisingly, thereís a federal law that covers employee retirement contributions. The Employee Retirement Income Security Act (ERISA) says that no matter what company you work for, your contributions ó and employer matching contributions ó are fully vested after three years. This applies only to defined contribution plans and the contributions made to them after 2006, when the law was passed. Employers must either fully vest employees in all defined benefit plans after five years or have a gradual vestment that terminates with full vestment after seven years.

Vestment and You

Once you know how vestment works at your company, you will find it will inform your decisions on whether to stay with the same company or to leave for greener pastures. Once money is vested, you can leave without worrying about leaving your benefits on the table. If youíre not vested, consider sticking around until you are. Unless the job is completely unbearable, it can be a much more prudent option.

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