Vesting Schedules and the Cost of Leaving Early

Two people leave the same job with the same $14,200 of employer match sitting in their 401(k). One resigns in month 35 and receives none of it. The other resigns in month 37 and keeps all of it. The plan has a three-year cliff, and nothing else about them differs.

That is a $14,200 decision made by a resignation date, and almost nobody checks it before handing in a notice. Here is how to.

What vests, and what never needed to

Two pots of money sit in a 401(k) and only one is subject to any of this.

Your own contributions are yours immediately. Every dollar you elect to defer from your pay, plus everything it has earned, belongs to you from the day it goes in. No schedule, no conditions, no exceptions. If you resign tomorrow after one month, that money leaves with you.

The employer's contributions may not be yours yet. The match, and any profit-sharing or non-elective contribution, can be subject to a vesting schedule. Until it vests you are holding it rather than owning it.

Your statement usually shows this directly, as a vested balance alongside the total. The difference between the two numbers is what you would walk away from today, and it is the single most useful figure on the page.

Cliff against graded

Two shapes, and the difference matters enormously to how you should think about timing.

A cliff schedule vests nothing until a date and then everything at once. Three years is the usual length. It produces an edge: one day either side of the cliff is the difference between all and nothing.

A graded schedule releases a percentage each year. A common shape runs from year two to year six:

Compare the three-year rows. On the graded schedule, three years of service is worth $5,680. On a three-year cliff, the same three years is worth $14,200, and two years and eleven months is worth nothing.

Which means the two schedules call for completely different behaviour. Under a graded schedule, timing a departure buys you a slice, and the slice gets smaller as a share of the total each year. Under a cliff, timing is either worth everything or worth nothing, and there is a specific date on which it flips.

Reading your own schedule

Three things to establish, in this order.

1. The schedule type and length. In the summary plan description under "vesting". One email to HR also works: "What is our vesting schedule for employer contributions?"

2. How service is counted. This is where people miscalculate. A "year of service" is usually a plan year in which you worked at least 1,000 hours, and the plan year may not run January to December. Your third year of service is therefore not necessarily your third anniversary, and the gap can be months.

3. Your vested balance today. On the statement. If it equals the total, you are fully vested and none of this applies to you any more.

One thing that is not required: contributing. Vesting counts service, not participation. A year in which you contributed nothing at all still counts towards the schedule, as long as you worked the hours.

While the plan document is open, check one more thing: whether the match is calculated per pay period and whether there is a true-up. That is the other plan feature worth thousands a year, and it catches people who reach the annual limit early rather than people who leave early. It is in the 401(k) true-up, and the same email to HR answers both questions.

The resignation-timing calculation

If you are within a few months of a cliff, do this before you accept anything.

1. Find the exact vesting date, in terms of service years as the plan defines them rather than your anniversary.
2. Read the unvested amount off your statement. That is the figure at stake.
3. Work out the delay needed, in weeks, and what the new job pays over that period.
4. Compare the two directly. Waiting seven weeks to keep $14,200 is worth roughly $2,029 a week, and almost no pay rise is worth more than that for seven weeks.
5. Put it in the negotiation. "I can start on the 14th rather than immediately" is an ordinary request, and a new employer has no reason to refuse it. You do not have to explain why.

Two cautions. Redundancy, dismissal or a plan termination can change the picture entirely, and in some cases full vesting is triggered automatically. And do not resign on the vesting date itself without confirming how your plan treats a partial final year, because the last few days can fall either side depending on the definition.

What happens to money you forfeit

It does not disappear and it does not go to your colleagues as a bonus. Forfeited amounts go into the plan's forfeiture account and are used to fund future employer contributions or to pay plan expenses, which is set out in the plan document.

That is worth knowing for one reason: it means there is no discretion to appeal to. Nobody at your employer is choosing to keep your money, so there is no conversation to have about it after the fact. The only lever is the date, and the only time to pull it is before you resign.

When this does not apply

If your plan has immediate vesting. Many do, particularly safe harbour plans, where employer contributions are fully vested from day one. Check the statement: if the vested and total balances are equal and always have been, there is nothing here to manage.

If you are being made redundant or the plan is terminating. Full vesting is often triggered in those circumstances regardless of service. Ask the plan administrator directly rather than assuming you have forfeited anything.

If the unvested amount is small. Below about $2,000, timing a career decision around it is a poor trade. Take the better job.

If you are counting on vesting to justify staying in a job you should leave. A cliff eighteen months away is not a reason to stay eighteen months. Run the number: if the unvested amount is $6,000 and the new job pays $9,000 more a year, waiting costs you money.

If you have already left. The forfeiture happened at separation and there is no route back. What you can still do is deal with the balance well, which is what to do with an old 401(k).

Next steps

1. Open your latest 401(k) statement and find the vested balance beside the total. Write down the difference.
2. Find the schedule in your summary plan description, and the definition of a year of service with it.
3. Work out your exact vesting date under that definition, not your anniversary.
4. If you are within six months of a cliff, treat the start date at any new job as negotiable.
5. Whatever the schedule says, keep contributing enough to capture the full match. Vesting is never a reason to leave that behind.