What Does It Mean To Be Vested?

Last Sunday, I hit a major milestone at my company. I have officially been working here for 2 years. In some ways, it feels like I’m just starting but in others I feel like a seasoned veteran. This is especially true since the average job tenure of people my age is just 3 years (should I be looking for a new job already?). The anniversary date came and went without any fanfare. I didn’t get to chose an anniversary gift out of a magazine, or even receive a card from my company. I actually got something much, much better: I vested.

What is Vesting?

Vesting is a term used to describe how much of your 401k you are allowed to take with you if you leave the company. You may be thinking “Wait, I don’t get to keep my entire 401k?” Before you overreact, I want to be clear that vesting only applies to the portion that your company contributes. If you invest $5,000 in your 401k, and your company contributes $1,000, vesting only applies to the $1,000. You get to keep your $5,000 plus whatever you’ve earned in the market when you leave.

The terms of your vesting can vary widely company to company. For example, my wife’s matching contributions from her company are 100% invested from day one. My company, however, has a more graduated vesting schedule. I am 40% vested after 2 years (meaning I get to keep 40% of what my company has contributed), with the rest coming the longer I am with the company.

Why Do Companies Do This?

Companies use vesting as a tool to reward their long-time employees and encourage people to stay at the company. A person who is constantly moving from one company to the other is unlikely to ever vest with their company, and so therefore misses out on a lot of retirement wealth. With vesting, all of a sudden staying at a company for an extra year or two means not only maintaining your salary for that amount of time, but could also mean a large financial windfall at the end of it.

What Happens To The Money That Is Not Yet Vested?

Your company contributions that haven’t vested yet are invested alongside your own investments, in the exact investments you chose. If you chose 50% in stocks and 50% in bonds, your un-vested balance will be invested in the exact same configuration. So as your own contributions grow with the stock market, so do the company contributions. The 401k administrator (ex. Fidelity or T. Rowe Price) maintains two separate accounts, and merges them as you earn your vesting schedule. However, if you decide to leave the company, any non-vested amount goes back to the company.

How Do I Factor Non-Vested Savings Into My Net Worth?

Because any non-vested 401k savings is technically not yours, you should not factor it into your net worth calculations. This is true even if you expect to be at the company for a long enough period of time to fully vest. My retirement platform clearly splits out the balance between my vested savings, making it easy to determine how much is mine and how much I would miss out on if I quit tomorrow. Right now, that balance just got quite a bit bigger and is a significant boost to my retirement savings.

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