What is vesting, and how does it impact my transfer?
You may see on your account statement that your account is fully or partially vested. Below, we cover vesting and important aspects of your vesting schedule. As it pertains to a direct rollover, vesting may impact the amount of funds we are able to successfully transfer, but it should not affect our ability to complete the transfer.
What is vesting?
Vesting is a term used to describe the financial proportion of an employer-sponsored retirement plan an employee can take with them when leaving a company. In short, vesting refers to the ownership of your 401(k) or similar plan, and other employer-provided securities like company stock. If your account statement indicates that you are 100% vested, it means you own every dollar in your 401(k), which is great news!
Job termination almost always stops vesting. If your account statement for a previous employer indicates you are 40% vested, for example, it will remain at 40% vested until retirement. This is true not only for retirement accounts, but for company stock holdings as well. The only exception occurs in certain situations when vesting may be allowed to continue or may even be accelerated (e.g. death, disability, or retirement, depending on plan and grant agreement).
How does vesting impact my retirement savings when I leave my job?
While all the money you personally contribute to your retirement account is yours and will go with you if you choose to leave their position, you do not own your employer’s retirement contribution until your vesting period is over and vesting is complete.
Example: some employers do not offer fully vested 401(k) plans until the employee has worked there for 3 years. If an employee with $10,000 in employer-matched assets that are 40% vested leaves a company, that employee is entitled to $4,000 of those funds. (Again, note that all of your contributions from your paycheck are yours; this only refers to the employer-matched funds).
In some companies, it can take 2-7 years for you to become fully vested in your plan. This is one of the ways your employer can encourage company loyalty and reduce financial risk due to employee turnover.
Rolling over your old account to your new employer-sponsored account or IRA account will not impact vesting in any way for 99.9% of the cases. If you know that your plan has a special provision for vesting to continue even after you are no longer employed with your old employer, it might make sense to wait for it to complete vesting before you rollover. Again, this is extremely rare!
What happens to my non-vested assets when I rollover?
If you are only partially vested in your retirement plan, and your employment is terminated or you leave your job, the amount of non-vested money left behind is called a forfeiture. Your previous employer will retain the non-vested percentage of your retirement balance when you leave your position.
Non-vested contributions are usually reclaimed by the employer normally around the time of termination. However, in some instances, forfeiture may not occur until you have not been employed for five consecutive years. During this time, non-vested money may still be available for you to invest and grow before it is reclaimed by your previous employer.
The frequently asked questions, or FAQs, are intended to be helpful and to get you thinking in a more sophisticated manner about your account transfer and related issues. However, these are not meant for accounting, tax, finance, or legal advice, not intended to be exhaustive, and do not create any relationship or duty on our part to assist your particular situation. We offer no warranties on the accuracy or completeness of the information as there could be developments of any kinds, including, but not limited to, any changes in relevant laws and regulations.