Many people who save in a 401(k) account receive a company match from their employer. But that money may not be theirs yet.
To take full control of these matching funds, workers may have to remain employed by a company for up to six years (nearly twice the tenure of a typical private sector worker), which could cause further economic damage to those laid off as the labor market cools.
401(k) matches are often referred to as “free” funds. Employees who contribute to a 401(k) plan can receive matching contributions back to their account from their employer, up to a certain amount.
About 81% of companies offering 401(k) plans offer a match to workers, according to the Plan Sponsor Council of America, an industry group representing employers with workplace retirement plans.
Depending on match conditions and worker income, match money wagered can be worth thousands of dollars a year, and even more when compounded over decades of investment.
According to PSCA, the most common employer match method, used by about 20% of employers, is to match half of the first 6% of a worker’s salary. So if a worker puts 6% of each paycheck into a 401(k), the employer will contribute an additional 3% to the 401(k).
However, while employees can see matching funds reflected in their 401(k) balances, most people don’t immediately own the funds.
Only 44% of employers that pay a 401(k) match offered so-called “immediate full vesting” in 2024, according to PSCA data published in November. In other words, any matching funds contributed by the employer immediately belong to the worker. Workers can take the money with them when they retire.
The rest of the players could take years to own a full game, perhaps up to 5-6 years.
“There may be service requirements,” said Hattie Greenan, PSCA’s research director. “Depending on the industry you’re in, it’s often used as a way to reduce turnover.”
As an alternative to the immediate full vesting of a 401(k) match, many companies offer “graded vesting.”
This means that employees take ownership of the matches in installments over a number of years.
For example, according to PSCA data, 15% of companies offer graduated vesting over five years. Employees may earn a 20% annual match for five years. An additional 14% offer 6-year gradual vesting.
Other companies use “cliff” vesting, meaning they give workers full match ownership after they reach a certain length of service, but pay nothing until the worker reaches that length of service.
About 10% of companies offer three-year cliff vesting, and a further 7% offer two-year cliff vesting, according to PSCA.
The typical private sector worker had been employed for three and a half years as of early 2024, according to the latest data from the Bureau of Labor Statistics.
Leaving your job or being laid off too early can cost you a lot of money in your retirement savings.
The US labor market has shown signs of weakness recently.
Outplacement firm Challenger, Gray & Christmas reported that October’s layoffs were the highest for the month in 22 years. The company said it was the worst year for announced layoffs since 2009.
Consumer confidence has fallen to its lowest level since April due to concerns about the job market.
