Many people saving in 401(k) accounts get a company match from their employer. But that money may not yet belong to them.
A person may have to remain employed with a company for up to six years — nearly twice as long as the typical private-sector worker stays in a job — to take full control of those matching funds, which may pose an additional financial hit for those laid off in a cooling labor market.
The 401(k) match is often referred to as “free” money: Employees who contribute to their 401(k) plan may get a matching contribution to their account from their employer, up to a certain amount.
About 81% of companies that offer a 401(k) plan offer a match to workers, according to the Plan Sponsor Council of America, a trade group that represents employers with workplace retirement plans.
Depending on the match terms and a worker’s earnings, the match money at stake could be worth thousands of dollars per year — and even more when compounded over decades of investing.
The most common employer match formula — used by about 20% of employers — is to match half of the first 6% of a worker’s salary, according to the PSCA. So, if a worker has 6% of each paycheck deposited into their 401(k), the employer would contribute an additional 3% to the 401(k).
However, while workers may see the matching funds reflected in their 401(k) balance, most don’t take ownership of it immediately.
Just 44% of employers that pay a 401(k) match offered so-called “immediate full vesting” in 2024, according to PSCA data issued in November. In other words, all of the matching funds contributed by an employer belong to the worker immediately. Workers can take that money with them if they leave.
For the rest, it may take many years — perhaps up to five or six — to own their full match.
“There might be a service requirement,” said Hattie Greenan, the PSCA’s director of research. “It’s often used as a way to reduce turnover, depending on the industry you’re in.”
In lieu of immediate full vesting of a 401(k) match, many companies offer “graduated vesting.”
That means employees take ownership of their match in tranches over a number of years.
For example, 15% of companies offer graduated vesting over a five-year period, according to PSCA data; an employee might gain 20% of their match per year for five years. Another 14% of companies offer six-year graduated vesting.
Others have “cliff” vesting, meaning they give ownership of the full match to workers after the workers reach a specific tenure, but pay none before workers reach that length of service.
About 10% of companies offer three-year cliff vesting, and another 7% offer two-year cliff vesting, according to the PSCA.
The typical private-sector worker had a tenure of 3.5 years in early 2024, according to the most recent Bureau of Labor Statistics data.
Leaving a job too soon or being laid off could be costly for retirement savings.
The U.S. labor market has shown signs of weakness lately.
Challenger, Gray & Christmas, an outplacement firm, reported that job cuts in October were the highest for the month in 22 years. It has been the worst year for announced layoffs since 2009, the firm said.
Consumer confidence has plunged to its lowest point since April amid anxiety over the job market.