| To be sure, 401(k) plan matching contributions can be a wonderful perk for employees. Under an employer matching program, your employer agrees to contribute money to your 401(k) account, matching what you save from your own paycheck, pre-tax, up to a certain limit.
For example, an employer might agree to match 100% of employees' 401(k) contributions up to a maximum 5% of salary.
That match from an employer is often referred to as "free" money and can be, therefore, one of the best ways to juice retirement savings.
Matching is indeed a terrific benefit. However, the money your employer contributes typically isn't yours right away. In fact, you may need to wait up to six years before it fully belongs to you. Also, you could lose it if you leave your job. In most cases, there is a point at which the funds your employer contributes legally become yours, and that's where vesting comes in.
So, that begs the question: Do you know what that "vested balance" means on your 401(k) plan statement? If you do, congrats, because many people just don't get it.
This is important concept for employees to understand. A few employers offer immediate vesting, meaning that you'll own your entire 401(k) balance at all times. But this isn't the common approach; most 401(k) plans vest employer contributions over time.
To that point, most employers choose one of the following two other vesting options: graded vesting or cliff vesting.
With graded vesting, you're gradually entitled to a bigger percentage of your employer match. A typical grading schedule looks like this: After one year working for the company, you're entitled to 0%; after two years, 20%; after three years, 40%; after four years, 60%; after five years, 80%; and after six years, 100%.
With a cliff vesting schedule, your 401(k) will fully vest at a specific time. Unlike with a graded vesting schedule, it doesn't happen gradually; you'll be exactly 0% vested one day and 100% the next. If your employer chooses to use cliff vesting, they can set the vesting time at up to three years. If they do this, you immediately become fully vested in your 401(k) account upon the third anniversary of your employment.
For more advice to help you make smart financial decisions, check out CNBC's Financial Advisor Hub and Personal Finance section. |
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