Unvested 401k Money: Leave it Behind?

A 401k vesting schedule is a common way for employers to provide an incentive for employees to stay on-board for more than a year or two. For the uninitiated, 401k vesting is when an employer makes a contribution on your behalf into a tax-deferred retirement account on a regular basis, but does not give you complete ownership of the money until you have meet certain requirements. While the money subject to 401k vesting earns interest the minute it is deposited, you may not be able to take all of that money with you if you quit before your employer’s allotted period of time. The difference between what you own and what will stay behind is called unvested 401k money.

For savvy workers, 401k vesting schedules are another important reason not to hop from job to job (in addition to the impact on your resume). But is there ever a time to cut your losses and head for greener pastures?

Suppose your employer’s 401k matching and profit-sharing contributions are subject to a five-year vesting schedule. You have worked there for two-plus, still enjoy the job, but have received a competing offer at another company.

Suppose your present company offers a 50% match on up to a 6% contribution to an employee’s 401(k), and an annual profit-sharing bonus that is deposited into the same account. Both of these benefits are subject to a five-year vesting schedule in which you own 20% of all monies contributed for each calendar year of employment. In other words, once an employee begins to contribute to his or her retirement fund, the full benefit won’t actually be realized until the employee’s fifth full year of work.

Further assume your current salary is $34,000 and you receive the maximum 3% 401k matching contribution from your employer and have received one profit-sharing deposit of $460. The current employer-contributed balance of your 401k is approximately $2,410 ($1,910 match + $460 profit sharing). If you were to resign work today you would only keep 40% of that ($964) due to the vesting schedule.

Assuming your new employer has a similar retirement contribution plan that you can enroll in immediately (not always the case), you would be leaving the unvested portion of this money on the table ($1,446). So you would need to make a salary of just $500 more per year to break even over the next three years, right? Not so fast. When you throw in the fact that the $1,446 is tax-deferred AND has the potential for returns, it’s not so easy.

If you could earn a 15% annual return on that money (difficult but not impossible with aggressive investments), it could actually be worth $2,200, or $754 more. So you would need to earn about $730 more a year, after taxes, (about $900 pre-tax), to do better than this money. So if you are offered a job with a salary of just $1,000 more, you can justify leaving your unvested 401k money behind.

But what if the new employer doesn’t offer retirement matching or delayed eligibility?

In this case you would have to consider the money your current employer deposits into my 401k as part of your actual salary, upping it by about $1,500. Add the amount required to break even with your unvested funds and you get $2,400. All other things equal, you would have to make more than $36,400 at a new job for it to be a fair trade. Chances are you wouldn’t consider trading in a job you like for much less than a 10% salary increase anyway, but it is helpful to know, numerically, a minimum acceptable salary.

Bottom line? Unvested 401k money provides a strong employee incentive not to make a lateral career change outside of the company but does little to thwart a competing job offer that dwarfs a worker’s current salary.