Employer matches and vesting schedules

You’ve started a new job and discovered that your employer offers matching contributions for your company 403(b). So what does that mean, exactly, for your savings and your paycheck? And what is the significance of the “vesting schedule” for those matches?

Most companies that offer retirement plans will match, up to a set limit, their employees’ contributions to the plan, typically 3% to 6% of each worker’s salary. When you forfeit that match by not contributing at least that much of your paycheck (or by not contributing at all), you’re turning your back on free money – otherwise known as a “guaranteed return.” However, an employer is not required to contribute to a 403(b) plan – some nonprofits simply don’t have the funds to match.

If your employer does contribute to your plan through a company match, then it is important to understand “vesting schedules” and how they affect your savings plan.

When you forfeit that match by not contributing… you’re turning your back on free money – otherwise known as a “guaranteed return.”

To encourage employee loyalty, employers frequently subject their matching contributions to a time-delay, as detailed by their vesting schedule. In other words: The more years you work, the more of the company’s contributions you get to keep. Leave your job, and the contributed funds (or some percentage of them) revert back to the company. To be clear, this only applies to contributions made by your employer, not by you: You get to keep all money you contributed to your retirement account, no matter when you might leave the organization.

Vesting schedules come in three basic types.

• Immediate vesting: Employees gain 100% ownership of their employer’s matching money as soon as it lands in their accounts.
• Cliff vesting: These plans transfer 100% ownership to the employee in one big chunk after a specific period of service (for example, one year). Employees have no right to any of their matching contributions if they leave before that period expires, but they own it all on the day they reach the landmark date. Federal law requires that cliff vesting schedules in qualified retirement plans, such as a 401(k) or a 403(b), not exceed three years.
• Graded vesting: This gives employees gradually increasing ownership of matching contributions as their length of employment increases, ultimately resulting in 100% ownership. For example, a five-year graded vesting schedule might grant 20% ownership after the first year, then 20% more each year until employees gain full ownership (100%) at five years. If the employee leaves before five years are up, they get to keep only the percentage of the employer’s matching contributions in which they are “vested.” Federal law sets a six-year maximum on graded vesting schedules in retirement plans.

To reduce or eliminate the possibility of forfeiting any employer matching contributions that you may be eligible for, it is important to learn and understand the vesting schedule (and any other rules) at your organization.

Adapted from this article on The Balance.

FOR MORE INSIGHT

On getting retirement ready
Federal Government investment plans (U.S. Securities and Exchange Commission)
How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings (NerdWallet)
4 mistakes that can sabotage your 401(k) (Time)
Compound interest calculator (U.S. Securities and Exchange Commission)
Social Security claims calculator (Consumer Finance Protection Bureau)

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