There are certain pitfalls to saving for retirement in a 401(k), like limited investment choices and, in some cases, costly administrative fees. But there's also a major benefit to participating in a company 401(k) plan -- the opportunity to snag a match.
Many companies have 401(k) matching programs, and they're basically free money. You contribute to your retirement plan, your employer adds some money on top, and voilà -- your balance is able to grow more quickly.
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But just because your company offers a 401(k) match doesn't mean you're guaranteed to get all of that money, even if you contribute enough out of your paychecks in theory to claim it in full. One sneaky rule could make it so you don't end up with the match you're expecting.
Will you get tripped up by your company's vesting schedule?
When an employer offers a 401(k) match, the money they contribute to your retirement account does not always belong to you immediately. If your company has a vesting schedule, you own that money based on how long you stay with the company.
Some employers offer immediate vesting in their 401(k)s. In that case, every dollar your company contributes to your savings is yours right away.
But many companies use vesting schedules so employees are incentivized not to jump ship after getting free money for their 401(k)s. And if your company has a vesting schedule, you may need to follow certain rules to get your 401(k) match in full or at all.
These vesting programs usually work in one of two ways. With graded vesting, the longer you stay with your company, the more of your match you get to take ownership of.
For example, if your has company has a three-year graded vesting program, you might become 33.33% vested after one year, 66.66% vested after two years, and fully vested after three years.
With cliff vesting, on the other hand, you receive none of your company's 401(k) match unless you remain employed for a preset period. For example, if your company has a three-year cliff vesting policy, if you leave after the one-year mark, you won't be 33.3% vested -- you'll be 0% vested and get none of your match.
Pay attention to the rules
Since it's not uncommon for companies to impose a vesting schedule, it's extremely important that you understand your employer's rules. You don't want to bank on a workplace match only to end up not getting that money.
That said, you should know that any money you contribute to your 401(k) out of your own paychecks is yours immediately. Vesting schedules do not apply to employee contributions -- only employer contributions.
And you shouldn't necessarily stick out a job you can't stand just to get your match. If you're one year into a three-year cliff vesting schedule, torturing yourself for two more years may not be worth it if your match is relatively small.
Know the rules before you start contributing to your workplace 401(k). That could help you better manage your money and career decisions.
