By: Jeremy Veres, CFP®, AIF® There are many different things to consider when leaving a job. Location, pay, work environment and job title are all things that you might consider. One thing that is often overlooked that could be directly costing you money is your employer’s retirement account’s vesting schedule.
Typically, when you contribute to an employer retirement account the employer has some type of percentage match (usually 3 or 4%). Most people think once that money is in their account, it is theirs for good, but as always in life, what sounds too good to be true usually is. If it is not fully vested when you leave your job, the portion that is not vested is “forfeited” back to your employer. So next time you go to rollover your retirement account after you leave a job, check the vesting schedule before you do so you know what amount will actually be available.
There are three different types of vesting schedules for retirement accounts:
1. Immediate
Employees with this type of vesting schedule are immediately 100% vested and have full rights to their employer’s contributions once it is in their account.
2. Graded
This vesting schedule gives the employee gradual increases in percentage owned after each year until they are at 100%.
For example:
- Year 1: 0% vested, year 2: 20% vested, Year 3: 40% vested, year 4: 60% vested, year 5: 80% vested, year 6: 100% vested
Federal law sets a 6-year maximum on graded vesting schedules in retirement plans.
3. Cliff
This vesting schedule transfers 100% rights to the employee at once in an all-or-nothing basis.
For example:
- Year 1: 0% vested, year 2: 0% vested, year 3: 100% vested
- Federal law requires that cliff vesting schedules not exceed 3-years.
The vesting schedule will probably not have a huge impact on whether you decide to stay at a job or not, but if it means you only have to stay a little bit longer to reach a new breakpoint, it is definitely something you should consider.
