Why Frequent Job-Changers are Getting Crushed by Vesting SchedulesInvestment Insights Retirement Article
Gone are the times when you retired from the job you got out of high school or college, and it’s crushing the balances of frequent job-changers' retirement plans. It’s a ‘find a job you love’ type of world now where people average around 12 jobs during their lifetime. Don’t get me wrong, doing something you love for a living is much less burdensome on your mental state than getting up every day doing something that gives zero satisfaction, but these changes can have a direct effect on account balances.
On to Better Places
What most people know when they begin a new job: the job has a retirement plan (a 401(k) being the most common), that plan has some sort of employer match, and it has some kind of vesting schedule. Vesting schedule: a term that is followed by a percent and years that you may or may not understand, but I am here to explain.
In most cases, employees are now the predictors of their own financial futures. If you are part of a defined contribution plan, for example, a 401(k), the decision falls on your shoulders to choose what you should be putting away for your life after work. Your employer’s responsibility lies in providing the plan and then (possibly) matching contributions up to a certain percentage. Are you taking advantage of that match? If not, you should be. Free money is the best money.
Duration of Jobs
Notes from the 2014 Employee Tenure Summary from the Bureau of Labor Statistics:
with workers ages 25-29, 87% had an average length of employment of fewer than 5 years
with workers ages 30-34, 83% had an average length of employment of fewer than 5 years
with workers ages 35-39, 76% had an average length of employment of fewer than 5 years
with workers ages 40-48, 69% had an average length of employment of fewer than 5 years
Why do employers have vesting schedules in the first place? The honest answer: employee retention. Vesting is related to the “portability” of plan assets or how long an employee must remain to be allowed to retain the plan assets accumulated in their behalf. It’s a financial incentive to the employee to continue to work for an employer until their account is “fully vested.” What does it fully vested mean? Being fully vested means that you are fully entitled to all assets in your employer sponsored retirement fund, pension plan, stock options, etc. The vested assets can never be taken away from you. However, leaving an employer before money is fully vested is leaving money on the table. (**Note: you are always 100% vested with your own contributions. Vesting refers to the assets contributed by an employer.)
It’s important to know the vesting schedule that your specific employer has. If this is something that you don’t know, talk to your HR department. If you plan to switch careers or companies at some point, leaving before you complete a vesting benchmark is a cause for losing a nice chunk of account value. I’m not recommending that you stay at a job that you hate, but it’s worth crunching some numbers if you’re considering the move.
3 Types of Vesting
Immediate vesting means that any assets put into your plan by an employer are yours immediately - there is no waiting or vesting period. If you were to leave a company with immediate vesting, you would be able to take the full value of your account at the time.
A cliff vesting schedule provides an employee full rights to the plan’s assets immediately upon the passage of a certain number of years of service, usually 3 years. Vesting done is this manner must reach 100% by the third year of service.
Graduated (or Graded)
A graduated vesting schedule provides an employee with full rights to a certain percentage benefit (less than 100%) after completing a certain number of years of service. Additional percentages are then added with the additional years of service. The maximum that an employer can extend a graduated plan before the vested amount reaches 100% is 6 years.
*plan data is according to 2017 rules and regulations and may be subject to change
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