Today was a big milestone for me. I’ve been vested! So I thought that I would discuss it a bit and what all it means.
First let’s start by talking about a company match, typically thought of as free money. Some employers, as part of their benefits package, match part of their employee’s retirement account contributions. Like any other benefit, part of the rationale behind the company match is to entice people to want to work for the employer. People are attracted to employers with good benefits packages. Also, employers receive a tax benefit for contributing to employee 401(k) accounts. A company match has the power to greatly increase the value of an employer-sponsored retirement savings account and I beg you to take advantage of it if your company offers one.
There is a wide range of company match levels. A typical matching situation is: the employer matches 50% of employee contributions for the first 6%-of-salary that an employee contributes – so the company will not match more than 3% of the employees’ salary. Some companies will provide a straight match, up to a certain limit – rather than matching 50% of employee contributions, they will match 100% of employee contributions up to a set percentage-of-employee-income. A few companies will provide a dollar-for-dollar match on all contributions by an employee, though it is rare and if you ever find this you better make sure to count your luck stars and max out your 401(k) every year no matter what cause that’s a free $18k per year. Under those circumstances, the company match would be limited only because the employee contribution is limited.
My company offers a straight 5% match of my contributions. So, if I were to only contribute 4% of my salary to my 401(k) – they would only contribute 4% of my salary to my 401(k). But since I contribute 17% of my salary to my 401(k) they contribute 5% of my salary to my 401(k). So here’s what it currently looks like for each bi-weekly pay period:
Pre-Tax Salary - $2,374.95
401(k) at 17% - $403.74
Match at 5% - $118.75
Our company policy is that the portion that they match will get automatically invested into their company stock, then you can go have it moved out when you want. Since my company’s stock has been performing nicely and the future looks promising I have been waiting to sell out until after I’m fully vested. So between the company match and the growth that that investment has seen I’ve received $11,740 from them over the past 3 year, that’s roughly $3,913 of freeeeee money each year.
Now that we understand the company match, we can discuss vesting. Vesting refers to the practice of delaying an employee’s ownership of the company match (or any other company contribution, like profit-sharing) for a specified number of years. So a company match contribution to a 401(k) plan will grow as part of the overall account value, but the employee could not rollover or take distributions on any portion of company match money that is not vested, or owned by that employee.
At my company it breaks down like this:
1 Year of Employment = 25% Vested
2 Year of Employment = 50% Vested
3 Year of Employment = 100% Vested
So, if I had decided to quit my job yesterday I would have only been able to keep 50% of company match that they had given me over the years. But now that I have completed my 3 years of servitude I can walk out at any time and keep all of that match in my 401(k). And now that I’ve reached my 100% vested milestone? I think I’m going to go start looking for another job that I might actually enjoy doing!
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