A 401k plan is a wonderful chance for employees and employers to contribute money to a retirement account. When considering participation, the vesting period or the point where the account and balance is fully vested should be understood.
To be 100% vested means the balances in the account are available to the employee in the form of rollovers and transfers – should the person leave the company. If the person has not completed a minimum number of years with the company during the plan, the employer may deduct the non-vested portion of THEIR contributions to the account (the matching). Every dollar put in by the employee out of their paycheck is always permanent. The account could lose value, but no money placed by the employee into the 401k is held back because of the vested regulations.
A 401 k plan is an employer – employee trust account or profit sharing arrangement. These retirement products were created as a way for employees to save money tax deferred, growing their retirement balances over a period of years working for the company. The company contributes money to the account (for the employee). This amount of contribution will pay a part in the vesting period of how much the balances are that may be fully vested for the employee.
Because a 401k is a loyalty based retirement plan, certain rules need to be in place regarding the rollover, transfer or even distribution of assets and balances. It would not be right for a worker to join a plan by a company that may happen to have dollar for dollar matching for instance and then the employee leaves their job in 1 year and rolls over $10,000 in 401 k balances when the company contributed $5000 of that money. Since vesting periods are normally 5 years or so, in the example just cited, the person would only be 20% vested. The rules and circumstances are not all or none, nor should they be. The number of years before having your term completed (per the plan) are simply deducted from the company contributions made to the plan.
If the employee contributed $5000 and the employer contributed $5000 while the person is 20% vested, the amount the company can withhold would be $4000. As only 20% of the company’s contribution can be transferred or rolled over to a new plan, whether it is a 401k or other qualified account.
Rules and Regulations
The 401k vesting rules make good market sense and in the end are for the benefit of employees who participate in these plans. If these regulations were not in place, businesses might cut back on the percentages and matching amounts which in the end are a big benefit with 401 k accounts. A company would look to save money somewhere and that could come from scaled back contribution amounts, plan choices or even other areas such as salary and bonus. Vested rules and vesting regulations should always be looked at for improvement but in the end they need to be understood by the employee when participating and the account should be better for the number of years in the plan.
Nick Hunter is the President of American Investment Training. AIT provides free 401k and retirement planning resources help to employees, investors and company plan administrators. 401 k Account Questions