The 401(k) Vesting Schedule: Why You Should Care
Depending on your 401(k) vesting schedule, it may take you up to 6 years to fully own your matching contributions.
Unfortunately, the 401(k) vesting schedule isn’t always clear to everyone.
In a recent Vanguard survey, “The firm found that only a third (33%) of respondents could correctly state whether their plan has a vesting schedule.”¹
This may explain why Vanguard also reports, “Forfeitures occur in 30% of job separations, are most common among lower-income participants, and represent 40%, on average, of the affected participants’ final account balances.”²
If an employee is not fully vested, it will result in a forfeiture of matching funds.
A larger study by Yale Law Journal found that “1.8 million plan participants forfeited compensation because they terminated employment (voluntarily or involuntarily) without being fully vested in their employer plan contributions. […] Additionally, in the 909 plans we analyzed, we found that forfeitures used in 2022 amounted to a staggering $1.5 billion.”³
These numbers represent an overwhelming number of Americans who suffered because of the 401(k) vesting schedule.
You don’t want to forfeit any contributions, which is why we feel it is important to understand your 401(k) vesting schedule clearly.
Keep reading for the breakdown of 401(k) vesting schedules so you can make informed decisions for your future.
What Is Vesting?
According to the IRS, “‘Vesting’ in a retirement plan means ownership. This means that each employee will vest, or own, a certain percentage of their account in the plan each year. An employee who is 100% vested in his or her account balance owns 100% of it and the employer cannot forfeit, or take it back, for any reason.”⁴
Whatever an individual employee contributes to his or her 401(k) plan is 100% fully owned by the employee.
We often tell our followers to contribute enough to their 401(k) to earn the company match.
Many employers offer employer matching (about 81% of companies offer matching contributions to workers’ retirement savings), which means the company will contribute a certain amount to a 401(k) plan based on the employee’s annual contribution.⁵
This is essentially free money – so we always encourage followers to get the company match.
But the amount of this employer contribution that belongs to you depends on the 401(k) vesting schedule.
Vesting, therefore, refers to your legal right to own what your employer has contributed as a company match.
What Is a Vesting Schedule?
A 401(k) vesting schedule is the length of time you must stay working for your company for matching contributions to be 100% yours.
Sometimes a company says employees are immediately vested, which means they own the employer match contributions right away.
According to CNBC, “More than 44% of 401(k) plans offer immediate full vesting of a company match. […] That share is up from 40.6% in 2012.”⁶
However, many companies have different vesting schedules that determine how much of the employer match you own (or are vested in) by how long you have worked for the company.
CNBC reports, “56% of 401(k) plans, use either a “cliff” or “graded” schedule to determine the timeline. […] Almost 30% of 401(k) plans use a graded five- or six-year schedule for their company match.”⁷
To determine the amount of the employer match contributions you own, we recommend you understand the 401(k) vesting schedule and know your employment start date.
What Are the Different Types of Vesting Schedules?
A 401(k) vesting schedule refers to employee timelines that determine how long it takes until an employee is fully vested (or fully owns their employer match contributions).
Immediate Vesting Schedule
The best 401(k) vesting schedule is one that offers immediate full vesting.
Fortunately, more companies are offering immediate full vesting of the company match.⁸
An immediate vesting schedule means the employee owns the employer’s contribution as soon as they receive it in their 401(k) account.
Cliff Vesting Schedule
The cliff vesting schedule is when a company requires employees to stay employed with them for a specified period before the money the employer contributed belongs to the employee.
A cliff vesting schedule can be up to three years.
In this 401(k) vesting schedule, employees do not own any of the company match until they have reached the specified time.
Once they reach the specified time, the employee is fully vested.
Graded Vesting Schedule
The graded vesting schedule means the employee vests a certain percentage of the employer matching dollars in a set period of time until they are 100% vested.
In other words, employees gradually become vested.
For example, 20% might be vested after your first year working, 40% vested in the second year, etc.
By law, employers must vest employees at least 20% at the end of 2 years, and another 20% annually each year thereafter.
This means by the end of year 6 of working for your company, you will be 100% vested in the company match.
What If I Leave My Job before Being Fully Vested?
Remember, an employee always owns their own contributions to their 401(k).
So, even if you leave a company, the money you contributed to your 401(k) is yours.
However, you may have to forfeit your employer matching contributions if you leave before you are fully vested.
This all depends on the 401(k) vesting schedule at your company.
If your 401(k) plan offers immediate 100% vesting of a company match, you own the whole match – even if you leave the company.
In contrast, if your company follows a cliff vesting schedule and you leave before your company’s three-year mark to be vested, you’d have to forfeit all the employer matching contributions.
If your company follows a graded vesting schedule and you leave the company before you are fully vested, you will owe your company.
For example, if you leave the company after 4 years and your company has a 6-year vesting schedule, you will own 60% of the amount your employer has contributed if they vested 20% at the end of year 2, 20% year 3, and 20% year 4.
You don’t want to have to give any money back!
We feel it is important you learn about your company’s vesting schedule so that you can be fully prepared to keep or forfeit your employer match.
If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.
SOURCES
- https://www.napa-net.org/news/2025/2/do-401k-vesting-schedules-help-with-worker-retention/
- https://www.napa-net.org/news/2025/2/do-401k-vesting-schedules-help-with-worker-retention/
- https://www.yalelawjournal.org/forum/the-effects-of-401k-vesting-schedulesin-numbers
- https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting
- https://www.cnbc.com/2023/05/26/vesting-schedules-mean-a-401k-match-can-take-years-to-own.html
- https://www.cnbc.com/2023/05/26/vesting-schedules-mean-a-401k-match-can-take-years-to-own.html
- https://www.cnbc.com/2023/05/26/vesting-schedules-mean-a-401k-match-can-take-years-to-own.html
- https://www.cnbc.com/2023/05/26/vesting-schedules-mean-a-401k-match-can-take-years-to-own.html
