You may be losing out on retirement money if you leave your job early

Many companies offer retirement accounts, like 401(k)s, where you can set aside a percentage of your paycheck for tax-deferred saving or investing. If you withdraw money from a traditional 401(k) before the age of 59½, you’ll face a tax penalty unless the withdrawal meets certain conditions. Most employers who provide a 401(k) option will make matching contributions to your retirement account. You will always own all of the contributions that you make. And some companies provide immediate vesting, meaning you’re fully entitled to your company’s contributions once it makes them. But some companies have vesting schedules that require you to work there a certain number of years before you’re entitled to that money. They can take the form of either “cliff vesting” or “graded vesting,” according to the Internal Revenue Service. When it comes to graded vesting, you own a certain percentage of your employer’s contributions after each year of work. For example, some companies might have a six-year graded vesting schedule in which you own 20% after your second year of service, 40% after your third year and so on. But when it comes to cliff vesting, you own 100% of your employer’s contribution after a certain number of years. A cliff vesting schedule can’t be longer than three years, so by your fourth year of service, your employer must ensure that you’re fully vested. So if you work for an organization with a three-year cliff, but you leave at the two-year mark, you lose all of its contributions, explained Anqi Chen, a senior research economist and assistant director of savings research at the Center for Retirement Research at Boston College. “That is, unfortunately, how it works,” Chen said.

How much money are Americans losing out on? 

This year, the investment company Vanguard released a report on the retirement savings behavior of participants in its plans. Among other things, it looked at vesting trends for defined-contribution plans with employer matching. Forty-seven percent of participants were enrolled in plans with immediate vesting, and the other 53% had cliff or graded schedules. Chen said a common employer contribution formula is to match 50% of your contributions up to the first 6% of your salary, which can equal as much as 3%. So let’s say a worker is making $74,000, they are entitled to that match and they’re on a three-year cliff vesting schedule. (The median eligible employee income stood at $74,000, according to Vanguard data.) “If someone left, let’s say, after two years, and that was the type of plan that they were in, then they would lose $4,400 of employer match by leaving in year two instead of staying until year three,” Chen said. That’s the minimum in this situation. Chen added that because your savings could earn compound interest, you’re losing out on even more money. Assuming a 4.5% annual return, that loss would grow to about $16,480 over the span of 30 years. “Vesting is certainly costing American workers,” she said. Many employees don’t even realize that the company they work for uses a vesting schedule, said Samantha Prince, an assistant professor at Penn State Dickinson Law. “They’re jumping in to work for a company that offers a 401(k) plan, and they’re excited … only to find out that they have to stay there three years,” she said. Prince, who authored a paper on how vesting schedules affect workers’ retirement wealth, said there are companies, such as Amazon and Home Depot, with three-year cliffs that have high employee turnover, exacerbating retirement insecurity. She found that nearly 237,000 Amazon employees left in 2021 without being vested, while that number was almost 130,000 for Home Depot. In contrast, examples of large companies with immediate vesting include Walmart (with the exception of profit-sharing contributions), Lowe’s and Netflix. In her paper, Prince states that if you leave before you vest, companies can reallocate the unvested money to other employees or use it to “reduce their plan administrative fees.” If an employee returns in a five-year window, employers also have the option to “replenish” the unvested account, according to the accounting firm Kahn, Litwin, Renza & Co. Marketplace reached out to Home Depot and Amazon for comment. A Home Depot spokesperson said over email: “We invest heavily in the benefits we provide, and we aim to retain and holistically support associates at every stage of life. Our match is designed as both a benefit and retention tool.” An Amazon spokesperson said: “Amazon offers a comprehensive benefits package to all regular full-time employees, which includes health insurance from an employee’s first day on the job, a 401(k) plan with a company match, up to 20 weeks of paid leave for birthing parents, free mental health support, access to subsidized skills training opportunities, and more.” In reference to the number of Amazon employees who have left without being vested, the spokesperson said: “Our hourly roles include both short-term and long-term jobs with great pay and great benefits and in those roles, some employees stay with us throughout the year and others choose to only work with us for a few months to make some extra income when they need it. Prince of Penn State said the intention behind vesting schedules is not to “rip people off.” “But the result turns out to be: People are going to lose their money if they don’t stay long enough,” she said. The main reason employers use vesting schedules is to encourage employee retention. You could call it handcuffing, Prince said. “You’re going to handcuff the employee to the business until they vest,” Prince said. “Then you hope that people stay even after that.”

Is it time to abolish the vesting schedule?

Prince said she would like to see the end of vesting schedules entirely. “If you get rid of vesting schedules, you’re going to significantly increase people’s retirement wealth, first of all. Then you’re going to make it simpler for people to understand how much they have in retirement money,” she said. Under these schedules, workers can easily get confused about what portion of their assets is vested. Removing them would make it that much easier for workers to track their savings and figure out whether they need to save more, Prince explained. “There’s no reason to have it that complicated,” she said. She added that at the very least, vesting schedules should scale back the time required to stay with a company. In recent years, retirement savings rules have been reformed with bipartisan support, Prince noted. For example, there’s the Secure 2.0 Act of 2022, which will require 401(k) and 403(b) plans to automatically enroll eligible employees and allow part-time workers to participate if they’ve worked a certain length of time. But right now, Prince said, not many people are talking about vesting schedules. She hopes to nudge the spotlight in their direction.