Thanks to ‘vesting’ schedules, it can take up to 6 years for workers to own their 401(k) match

A 401(k) “match” from an employer is often referred to as “free” money, and therefore one of the best ways to juice retirement savings.

But there’s a catch — you may need to wait up to six years before it fully belongs to you.

A match is an employer contribution into a worker’s 401(k) account. The worker must contribute to the 401(k) plan to receive it. Employers generally match a worker’s contribution up to a certain percentage of the worker’s salary.

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About 81% of companies that offer a 401(k) plan made a matching contribution to workers’ retirement savings in 2021, according to the latest annual survey published by the Plan Sponsor Council of America, a trade group.

However, in most cases, workers don’t own this money right away due to “vesting” rules. (Vesting means ownership, in retirement parlance.)

Companies use different timelines, or vesting schedules, to determine how long it takes for savers to fully own the employer contributions.

In some cases, they must work at a company at least six years before the funds are theirs. They risk forfeiting some of the money — and investment earnings — if they walk away early.

A worker retains complete ownership of their match when it is 100% vested. (One important note: An employee always fully owns their own contributions.)

More than 44% of 401(k) plans offer immediate full vesting of a company match, according to the PSCA survey. This means the worker owns the whole match right away — the best outcome for savers. That share is up from 40.6% in 2012.

The rest, 56% of 401(k) plans, use either a “cliff” or “graded” schedule to determine the timeline.

Cliff vesting grants ownership in full after a specific point. For example, a saver whose 401(k) uses a three-year cliff vesting fully owns the company match after three years of service. However, they get nothing before then.

Graded schedules phase in ownership gradually, at set intervals. A saver with a five-year graded schedule owns 20% after year one, 40% after year two, and so on until reaching 100% after the fifth year.

For example, someone who gets 40% of a $5,000 match can walk away with $2,000 plus 40% of any investment earnings on the match.

Federal rules require full vesting within six years.

Almost a third, 30%, of 401(k) plans use a graded five- or six-year schedule for their company match, according to the PSCA survey. This formula is most common among small and midsize companies.

Vesting schedules tend to be a function of company culture and the philosophy of executives overseeing the retirement plan, Ellen Lander, principal and founder of Renaissance Benefit Advisors Group, based in Pearl River, New York, previously told CNBC.

Further, there are instances in which a worker may become 100% vested regardless of the length of their tenure.

For example, the tax code requires full vesting once a worker hits “normal retirement age,” as stipulated by the 401(k) plan. (For some companies, that may be age 65 or earlier.)

Some plans also offer full vesting in the case of death or disability.