401K Matching and Vesting
Shadox from Money and Such wrote up an excellent article about 401k Matching Pitfalls. After waiting for a year before my employer began matching contributions, I finally began contributing to my 401k this past May (my 1 year anniversary at my company).
I really should have taken advantage of the tax benefits of contributing to a 401k, even without the match, as it would have helped negate the taxes I owed this past filing season. However, as I mentioned in my linked article above, I felt that paying off debt was more important. That’s one reason we were able to pay off our $25,000 auto loan in just over 2 years, instead of the original 6 year loan. In that same time, I also paid off another $10,000 on my Honda Ridgeline (still the best truck ever made).
I really want to highlight one thing from Shadox’s article: Vesting Period. My original employer had a 5 year vesting period. They changed that to 3 years while I was still there, which helped greatly as I left after 4 years. That meant I got quite a few thousand dollars extra when I left, versus losing all that match.
It wasn’t until about a month after I began contributions with my current employer before I checked up on their vesting period. I was very pleasantly surprised to find out that I am vested immediately! They’re matching 100% for the first 3% of salary, plus 50% for the next 2%. That means with a 5% contribution, I get an extra 4% “free”. And this isn’t company stock either. It’s cold, hard cash that’s automatically dispersed across my investment elections.
Word of advice when considering a job change: If you aren’t vested yet, think about how much longer until you are. If you only have another year to wait, and it could mean thousands of dollars lost or gained, then maybe you should reconsider leaving your employer until you vest. If your prospective employer is really itching to bring you on-board, then tell them how much money you would lose and see if they could match that as a bonus (get the AFTER TAX AMOUNT to match) or direct contribution into your new 401k. Not many of us have that leverage power, but it’s worth a shot.
Great advice. Actually, you would be surprised how much negoiating power you have and the key is not to be afraid to ask. As long as it is legitimate, employers often give in and will provide major incentives since they want you here.
Clever Dude, first of all, thanks for the link to my post. It is appreiciated.
Second, you are making an excellent point about negotiating with a new employer to get a bonus to compensate for lost / unvested matching funds. Several years ago, I was in exactly such a situation and I was able to get not only an “unvested funds bonus” but also a signing bonus to compensate for a performance bonus I would be leaving behind by leaving my employer.
In the end, I chose to stay with my employer at the time, but the point is that these things are negotiable.
Can’t seem to fully embrace the vesting after required years of tenure concept. So, in an extreme example: I’ve worked for my company for 10 years. I just now start contributing to th 401K. Am I fully vested in their contributions immediately? Or do I need to be running calculations for each and every year’s contribution?
Clever Dude says
@LarryA, if your company requires 3 years to vest, then it’s 3 years after your first day of employment there. If you’ve been there 10 years but just start contributing now, you’re still vested since you’re well past your 3 years.
If your company requires 1 year before they start matching, it’s 1 year after your first day of employment, not after you start contributing. Hope that helps!