Your 401(k) match may not belong to you just yet

Many people who save in 401(k) accounts receive a company match from their employers. But this money may not belong to them yet.

Someone may have to work for a company for up to six years to gain full control of matching funds; That’s a longer timeline than is typical for many workers, which could pose an additional financial hit for those laid off in a cooling labor market.

401(k) matching is often referred to as “free” money: Employees who contribute to 401(k) plans may receive a matching contribution from their employer to their account, up to a certain amount.

About 81% of companies offering 401(k) plans offer workers a match, according to the Plan Sponsor Council of America, a trade group that represents employers with workplace retirement plans.

Depending on the match terms and the worker’s earnings, the match money involved can be worth thousands of dollars per year; and even more so when combined with decades of investment.

The most common employer matching formula, used by about 20 percent of employers, is to match one-half of the first 6 percent of a worker’s salary, according to the PSCA. So, if a worker saves 6%, the employer will contribute an additional 3% to the 401(k).

However, although workers see the matching funds reflected in their 401(k) balances, many do not take immediate ownership of it.

Only 44% of employers paying 401(k) matches offered so-called “immediate full vesting” in 2024, according to PSCA data released in November. In other words, all matching funds provided by the employer immediately belong to the employee. Workers can take this money with them if they leave.

For the rest, it may take many years (perhaps up to five or six) to have an exact match.

“There may be a service requirement,” said Hattie Greenan, PSCA’s director of research. “Depending on the industry you’re in, it’s often used as a way to reduce turnover.”

Leaving a job too early or being laid off can be costly in terms of retirement savings.

The US labor market has been showing signs of weakness lately.

Challenger, Gray & Christmas, a job placement company, reported that October layoffs were the highest month in 22 years. The company said this year was the worst year in terms of announced layoffs since 2009.

Consumer confidence fell to its lowest level since April due to the impact of concerns about the employment market.

For example, instead of full immediate vesting of a 401(k) match, many companies offer “tiered vesting.”

This means employees take ownership of their matches in tranches over several years.

For example, according to PSCA data, 15% of companies offer tiered vesting over a five-year period; An employee can earn 20% of their match each year for five years. Another 14% of companies offer six-year phased vesting.

Others have the “cliff” right; This means that they give ownership of the entire match to workers after they reach a certain tenure, but pay nothing before workers reach that tenure.

According to the PSCA, approximately 10% of companies offer three-year cliff rights and another 7% offer two-year cliff rights.

A typical private sector employee had tenure 3.5 years by early 2024, according to the latest Bureau of Labor Statistics data.