Forgot your password?

What is a vested 401k and how it pertains to you

By Edited Nov 13, 2013 1 1

What Does Vesting Mean

Vesting in a 401k is a common practice that many employers extend to their employees.   Before we go any further lets explain exactly what vesting is. Investopedia states, "Vesting is the process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account." In order to understand this better lets use an example and break this down piece by piece.

Stan begins working at Company X in January of 2011. He decides to participate in his company's retirement plan which matches his contributions up to 5%.  Fortunately for Stan Company X begins matching his contributions immediately however they tell him he will not be fully vested until he completes 3 full years of service. Stan's salary is $2,000 a month and each month he will contribute 5% ($100) to his retirement plan and the company matches his contribution by placing 5% ($100) in his retirement plan, so instead of $100 being contributed to his retirement plan, Stan is contributing twice that amount into his 401k. Now that Stan has his retirement plan set up, lets look at 2 different scenarios.

Scenario A

After working with Company X for 2 years Stan is offered a position with Company Z which he accepts. When Stan attempts to rollover his 401k, he is allowed to only take the 5% that he contributed to his plan and not the companies 5% match because he did not complete a full 3 years of service.  This means that he was not fully vested in his 401k and forfeits the right to keep the company match.

Scenario B

After working with Company X for 3 years Stan is offered a position with Company Z which he accepts. When Stan attempts to rollover his 401k, he is allowed to take the entire balance of his 401k which includes the cash he contributed and the matching contributions from his employer.  In this example, Stan is fully vested in his 401k and gets to keep all contributions made from both parties.

This is just one example of how a company may allow their employees to become vested in their 401k. Another example is the tiered method. In the table below, Stan is placed on a tiered schedule where each year of service gains him a larger percentage of the companies contributions. The following example shows how much of the company's match he will receive if he decides to leave based on his years of service to Company X.

Years of





401K With





Amount Stan







$ 1200
























The practice of vesting in a 401k is one that is beneficial to both the employer and the employee.  It allows employees to build their savings faster by essentially receiving free money and also the flexibility to leave the company after the specified vesting period without losing the company's matching contributions. It benefits the employer by enticing talented workers to stay and work for them. The examples shown here are just a couple of basic ways vesting works but should help you better understand the concept when it comes to understanding your companies vesting policies.

So if you are thinking about leaving your company, make sure you find out what your company's vesting policies are from the human resources department because in some cases you may find yourself leaving quite a bit of money on the table. Like with any other major life decision do your research, weigh your options and make an informed decision about whats right for you.



Aug 28, 2013 6:01am
Good information
Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money