Switching Jobs? Ignoring This 401(k) Detail Could Cost You Thousands In Retirement Savings

Key Takeaways

• Vesting schedules require employees to stay at a company for a period of time to gain ownership of their employer’s matching retirement contributions.
• At Vanguard, roughly one-half of retirement plans the investment firm manages have an immediate vesting schedule, but it's also common to have to wait several years to be vested.
• New research finds that nearly one-third of workers left before their vesting period ended, resulting in people forfeiting, on average, 40% of their retirement balances.

Generally, personal finance experts advise people to contribute enough to earn the employer match offered for their 401(k) retirement plan. However, what happens when there’s a vesting schedule that requires you to stay at a company for a few years to earn that match? 

Your own retirement contributions are always 100% vested and recoverable if you leave, but you may need to meet certain requirements before your employer’s contributions are vested. A vesting schedule refers to a period of time over which you gain ownership of your employer’s contributions. 

If you depart a job early (or before the vesting period ends), you could end up leaving thousands of dollars worth of retirement savings on the table. 

In a recent report, researchers evaluated Vanguard-managed retirement plans in 2022 and found that 30% of employee separations happened before the end of a participant’s vesting period.

In other words, when people left their jobs or were laid off before the end of the vesting period, they were forfeiting, on average, 40% of their final account balances. These forfeitures reduced the average worker’s retirement wealth by $26,000 at age 65, according to the report.

Vesting May Hurt Employees and Benefit Employers

Vesting schedules are meant to encourage employee retention and to give workers incentives to stay at companies for longer periods of time, but this recent research shows that may not be working. For example, the researchers found that younger and low-income workers had higher retirement plan forfeiture rates.

“Rather than providing effective retention incentives, vesting appears primarily to be an employer cost-control tool that disproportionately affects lower-income workers,” the researchers wrote.

Samantha Prince, an associate professor at Pennsylvania State University's Dickinson Law School, and other researchers evaluated more than 900 retirement plans in another recent paper. They found that, in 2022, workers forfeited more than $1.5 billion worth of employer contributions due to vesting schedules.

“We have a country where most private employees have to rely on 401(k) plans. We need to rely on what people call free money, [or] the company match, to help us get to retirement,” Prince said. “Why is this the thing that employers get to screw around with?”

According to Prince’s research, those forfeited funds flow back to employers, which then may redistribute the funds to other participants in their retirement plan.

“When a plan participant’s employment ends prior to vesting, the plan must use the forfeited funds, and this generates savings for employers,” researchers wrote.

What To Know About Vesting To Maximize Your Retirement Savings

In 2023, roughly one-half of retirement plans at Vanguard had immediate vesting schedules, while 24% of plans had either five- or six-year vesting periods.

If a plan has immediate vesting, it means that you automatically get to keep your employer’s matching contributions. If it doesn’t, you may have to stay at your employer for up to six years to receive the entirety of the match.

There are two types of vesting schedules: cliff and graded. With cliff vesting, you have to stay at an employer for a number of years, say three, before you’re 100%-vested. 

In contrast, if you have a graded vesting schedule, you gradually gain ownership of your employer’s contributions. For example, if you have a six-year graded vesting period, you might only be 40%-vested after three years, depending on how your employer calculates time of service to the company.

When workers are evaluating a job offer, experts recommend carefully assessing the length of the vesting schedule versus how long you expect to stay at the new job. 

“If there's a match and vesting schedule, it essentially means that that money's not yours until you satisfy their requirements,” Jason Siperstein, president and wealth advisor at Eliot Rose, said. 

“If you plan to stay at a company long-term, you can consider it almost free compensation ... However, if you're not going to be there for a long time—and it's hard to tell ahead of time—then I probably wouldn't even factor in the match," Siperstein said.

Calculate Your Vesting Loss

Scott Sturgeon, Certified Financial Planner (CFP) and founder of Oread Wealth Partners, said that if you’re leaving a job before the vesting period ends, you may want to calculate how much those matching contributions could be worth years down the line.

With 401(k)s, you don’t pay taxes until you take withdrawals in retirement, which means you get tax-free compound growth on your investments. Sturgeon recommends comparing the new job's potential raises against the expected value of the matching contributions you’re leaving on the table at your current employer.

And if you do end up leaving savings on the table, Siperstein suggests using a new raise to prioritize paying down high-interest debt, making sure your emergency fund is in order, and then contributing to your new employer’s 401(k) up to the matching point.