401(k) plans also come with vesting periods. The money that you place into the plan yourself will always be yours. But the company’s matching contributions are often conditional. They only become yours after you’ve been with the company for a set amount of time.
Vesting a 401(k) Plan
The vesting period will vary, often between three and seven years. Leave before your vesting period has ended, and you could receive none of those matching funds.
Alternatively, you might receive a share of those funds. Some companies might give you a percentage of the matching contributions for each year you spend at the company. Leave after a year, and you might take 20 percent of the matching contributions; hold on for five years and you get to keep it all.
That does give 401(k) plans a big risk. First, you need to know your vesting period to make sure that you time your departure from the company in a way that doesn’t cost you retirement money. But it also means that you might find yourself staying at a company you want to leave in order to run down the clock.
In practice though, the biggest cost of a 401(k) will be the temptation not to max out the matching contribution. The company will sign you up to the 401(k) plan automatically. It will make the payments to your plan automatically. But to land the matching contributions, you’ll need to take action. It’s just too tempting to do nothing and enjoy the greater take-home pay. It delivers benefits now but costs later.
It’s vital to make sure that you’re receiving everything your employer is willing to give you, even that does mean overcoming inertia and contributing more now.