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A friend was released from their job after 4 years, not vested. I understand 5 years are required to be vested.

Are they entitled to the contributions they made to the 401(k)?

  • 2
    Add a location tag please. – ventsyv Jul 26 at 20:00
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    @ventsyv - 401(k) == USA. Does it need to be more specific? – brhans Jul 26 at 22:46
60

Yes. Any contributions you make to your own 401(k) are yours - irrespective of when the contributions were made.

Contributions made to your 401(k) by your employer might be subject to a vesting schedule, in which case you may own all, some or none of them - depending on the vesting schedule and period of time since the contributions were made.

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    @joetaxpayer who keeps the money that falls from the hand of the employee due to vesting schedule ? Does it goes to the employer or the other participants or used by the plan administrator? – Neil Jul 25 at 20:25
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    I’m pretty certain it just reverts to the company. It’s actually tracked separately. I retired in ‘12, and my statements still show the funds (along with growth) that came from matching. – JoeTaxpayer Jul 25 at 20:58
  • @JoeTaxpayer I believe that the employer can't actually take the money. However I think they can use it to pay plan expenses or to pay the match to other employees in the future, so it's almost as if they get to keep the money themselves. – stannius Jul 26 at 16:30
19

As others have noted, you are always immediately vested in your own contributions.

For employer contributions, it is not legal to be totally unvested after 4 years of full-time service. If they have cliff (all or nothing) vesting, it must vested by 3 years. If they use graded vesting, it must be at least 60% vested by 4 years.

The cliff vs graded requirements are described here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting

14

Just because you are fired/quit/retire you don't lose access to logging into the 401(k) website.

As has been said already you own 100% of your contributions, but you own someplace between 0 and 100% of the companies contributions.

There are two places to look: on the website, and on any documentation you have from the company.

In places where I worked where there was a vesting schedule the account balance page could be configured to show the vested and unvested parts of the account. It can also be seen on a quarterly statement. That would tell you how much is vested, but it might not tell you when you will reach 100% vesting.

Counting years can be tricky. I have known companies to award a year as soon as you reach 850 hours in the calendar year. If you started in the middle of a calendar year you could hit "5 years" by your 4th anniversary.

5

It's your account. Your contribs are your money.

You will note that if you were given "online" (app or website) access to your 401K account, this is a completely different credential at a completely different internet domain. For instance my employer conducted business at www.example.com but my 401(k) portal was at www.etrade.com.

The company instantly disabled your company logins, however your 401(k) login still works and the money shows as still there.

A 401(k) is akin to a "group-plan IRA", and it grants higher contribution limits. It is still your money. You must still manage it, e.g. pick appropriate mutual funds etc.

Except...

Some companies will often do a company "match" - you put in $400, they put in an additional $100. They sometimes have "vesting rules" for this, which cancels the match if you quit too soon afterwards. That may be what you're talking about, but separate to that is stock option vesting.

If you took a loan from your 401(k), when you leave the company it must immediately be paid back, or the loan is paid using 401K funds. That might seem like a vesting issue.

When you leave, you become a target

Every broker on earth would love to "help you" move the money out of the 401K, and into their "tender care". This is a ripoff. Their goal is to put you into their high-cost investments which pay them big sales commissions.

For instance if you are in a Vanguard 401(k) with $100,000 in fund VFINX, which costs you $140/year in fund expenses. A broker will want to put you into AMRMX, with a $5750 "entry fee" and $570/year fund expenses. That's super bad for you - given how compounding works, that'll be $40,000 less in 40 years. AMRMX gets $570/year and your broker gets $5750 commission!!!

The company currently offering your 401(k) will also be naughty. They will send you letters rigged to sound like you're obliged to move the money. Read closer, it's not true. Again, they're hoping to move you into other investments that are more lucrative for them.

Because of these constant sales-jobs, people often become misled into thinking a 401(k) isn't their money (it is) or that they must move funds out of the 401(k) (they needn't).

Suggestions

I would suggest either

  1. Keeping it exactly where it is.
  2. Rolling it to your next company's 401(k), unless the current one is a good one.
  3. Or you could roll it to a traditional IRA, and that would later allow you to "convert to Roth". Roths are better than Traditional for non-math reasons (and for math reasons if tactically done in a "gap year"). However, they also have Roth 401Ks. And money in an IRA is not as well protected as 401(k) money. 401(k) money is immune to outside attack - it cannot be lost in bankruptcy (say, a medical bankruptcy), and cannot be taken by lien or lawsuit, and that is decided at the Federal level. IRAs may or may not have that protection; that's decided by individual states. Move, and you could lose protection.

Roth 401(k)s are a thing... but only if your plan offers that.

  • 1
    Not sure why this one got a down vote... – quid Jul 25 at 20:36
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    @quid - I'm actually surprised it has a positive vote tally, to be honest. It doesn't answer the OP's actual question. OP is asking how employer-match funds are handled if he leaves before being fully vested - not whether he should roll over his 401k or whether he can log in to check the balance. Making it worse... the first big bold text of "It's your account and your money" is actually the wrong answer for OP's actual question - if an employee leaves before being vested, it's definitely not simply "his money in his account". – Kevin Jul 25 at 21:08
  • @Harper (Unrelatedly,) I'm surprised to see advice contrary to the (seemingly common) "move your money from your previous employer's 401(k) ASAP!" Wouldn't you exit the group plan implicitly upon termination? I assume you'd at least have to establish an independent relationship with the investment company and take over any fees which the company might have been paying. – jpaugh Jul 25 at 21:12
  • @Kevin I think it's a big assumption to think the person asking the question understands the vesting distinction between employee and employer contributions. The question doesn't specify matched funds, and the last sentence seems to ask about employee contributions. I think the person is confused about where vesting may apply. – quid Jul 25 at 21:15
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    @jpaugh well, that perception is exactly why I included the last paragraphs :) Yes, the industry really wants you to believe that. But you can stay in the group plan if you like, whether it's a good plan should be a factor in deciding to move. Certainly don't move money from a good plan to a worse plan. – Harper Jul 25 at 22:29
1

In addition to other answers: even though one have access to the former employer's 401(k), it might make sense to roll it over to an IRA or 401(k) provided by the current employer. Things to consider are the fees (which could suddenly get higher when one leaves the company), and quality/variety of investment options the plan offers. Also, I find it convenient to keep the number of my retirement accounts low, and keep all of them in one place.

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    401(k) of current employer, yes. IRA, not so much. While it provides an opportunity for a Roth conversion, it also places the asset at risk should you be sued or enter involuntary bankruptcy owing to medical condition, downturn etc. – Harper Jul 25 at 15:05
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    @Harper it places the asset at some incremental additional risk. Retirement funds are generally protected in bankruptcy, but there have been instances of forced liquidation of IRAs. These were unusual cases. – quid Jul 25 at 15:27
  • @quid Because 401(k) protection flows from the Feds. The Feds do nothing to protect IRAs; any protection flows from the States. – Harper Jul 25 at 16:02
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    That's not true, the Papa Bush bankruptcy reform of 2005 protected IRAs federally. 401(k) is protected further because technically the 401(k) funds are assets of the employer. Additionally, SEP IRA, Simple IRA and other employer (meaning not individually held) type pension schemes are fully protected like 401(k) as are Rollover IRAs. There is a limit to the protection of IRA accounts but the limit is over $1mm. Some very zealous trustees have gotten in to IRA accounts recently but, again, that is unusual.. – quid Jul 25 at 17:08

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