You may be losing out on retirement money if you leave your job early 

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St. Louis listener Eric Schmidt asks.

We have a retirement allowance system based on matching with employers, but you must work for that company for 5 years. before the employer’s contributions are finalized. What happens to that money if it doesn’t reach 5 years? How much money are other Americans losing to employer-aligned retirement plans that also take (a lot of) time to vest? (Note: Schmid is a free contributor to Marketplace, but he submitted a question before that.)

If you don’t work for your employer for a period of time, you may lose your company’s matching contributions to retirement benefits.

Many companies offer retirement accounts like 401(k)s that allow you to use part of your paycheck for tax deferred savings and investments.if you withdraw money If you withdraw from a traditional 401(k) before you turn 59½, you will be subject to tax penalties unless your withdrawal meets certain conditions.

Most employers that offer a 401(k) option make a donation of the same amount into a retirement account.

You will always own all contributions below. you make. In addition, some companies offer instant vesting. Entitled to receive full contributions from your company Once it’s done.

However, some companies have vesting schedules that require you to work there for a certain number of years before you are entitled to that money.they can take either in the form of “cliff vesting” or “progressive vesting”, According to the Internal Revenue Service.

With tiered vesting, you own a percentage of your employer’s contributions after each year of service. For example, some companies have six-year tiered vesting schedules, such as 20% after the second year of employment and 40% after the third year.

But when it comes to cliff vesting, you own 100% of your employer’s contributions after a certain number of years. The cliff vesting schedule cannot exceed her three years, so by your fourth year of service your employer should be sure you are fully entitled.

So if you work for an organization that has a three-year cliff and retire in two years, all that contribution will be lost, explained Anki Chen, senior research economist and deputy director of savings research at the Center for Retirees. did. He studied at Boston University.

“Unfortunately, that’s how it works,” says Chen.

How much money are Americans losing?

This year, investment firm Vanguard report On the retirement savings behavior of plan participants. In particular, we focused on vesting trends for defined contribution schemes with employer matching. His 47% of participants were enrolled in a plan with immediate vesting, and the remaining 53% of him had cliff or phased schedules.

A typical employer contribution formula matches 50% of contributions to the first 6% of salary, and in some cases as much as 3%, Chen said. So let’s say a worker makes $74,000, is entitled to the match, and has a three-year cliff-besting schedule. (The median eligible employee earnings he had was $74,000, according to Vanguard data.)

“If someone were to retire, let’s say, after two years, and that person had such a plan, by retiring in year two instead of staying through year three, matching with an employer would cost 4,400 more. You’re going to lose dollars,” Chen said.

This is the bare minimum in this situation. Mr. Chen added that he would also lose a lot of money because savings could yield compound interest. Assuming an annual return of his 4.5%, that loss increases to about $16,480 over his 30 years.

“There is no doubt that vesting is taking a toll on American workers,” she says.

Many employees aren’t even aware that the company they work for has a vesting schedule, said Samantha Prince, assistant professor of law at Pennsylvania State University’s Dickinson School of Law.

“They jumped in to join a company that offers a 401(k) plan and they were thrilled … but they found out they had to stay there for three years,” she said.

Prince, who wrote a paper on how vesting schedules affect workers’ retirement wealth, said some companies: Amazon, home centers, etc. There is a “three-year cliff” where employee turnover is high and post-retirement anxiety is exacerbated.

She found that about 237,000 Amazon employees will leave without rights in 2021, compared to about 130,000 at Home Depot. In contrast, examples of large companies with immediate vesting include Walmart (excluding profit-sharing contributions), Lowe’s, and Netflix.

In his paper, Prince said that companies could reallocate unvested funds to other employees or use them to “reduce project management costs” if they retired before vesting. there is If the employee returns within her five years, the employer also has the option of: “Replenish” a pending accountAccording to accounting firm Khan Litwin Renza & Co.

Marketplace has reached out to Home Depot and Amazon for comment. A Home Depot spokesperson said in an email:

“We invest heavily in the benefits we offer and aim to retain and holistically support our employees at all stages of life. Our game is both profit and retention. It is designed as a tool for

An Amazon spokesperson said:

“Amazon offers a comprehensive package of benefits for all regular full-time employees, including health insurance from the employee’s first day of employment, a company-matched 401(k) plan, Up to 20 weeks of paid time off for parents, free mental health support, access to subsidized skills training opportunities, and more.”

Regarding the number of Amazon employees who left without acquiring rights, a spokesperson said: “Our hourly jobs include both short-term and long-term jobs with high salaries and benefits, and in those roles we have some employees who work for us year-round, but additional Some employees choose to work only for a few months to earn income when they need it.

The Prince of Pennsylvania said the intent behind the vesting schedule was not to “fool people.”

“But it turns out that people lose money if they don’t stay long enough,” she says.

The primary reason employers use vesting schedules is to promote employee retention. You could call it handcuffing, Prince said.

“They will be handcuffed to the company until the rights are finalized,” Prince said. “Then you’ll want people to stay after that.”

Is it time to do away with vesting schedules?

Prince said he wanted to do away with the vesting schedule altogether.

“If you do away with the vesting schedule, first of all, it will increase people’s retirement wealth significantly. will be,” she said.

Under such a schedule, employees can easily become confused about what portion of their assets are vested. Removing these would make it much easier for workers to track their savings and determine if they need to save more, Prince explained.

“There’s no reason to make it that complicated,” she said.

He added that at least the vesting schedule should reduce the length of time required to stay with the company.

Retirement savings rules have been reformed in recent years with bipartisan support, Prince said. For example, the Secure 2.0 Act of 2022 mandates 401(k) and 403(b) plans that automatically enroll eligible employees and allow part-time workers to participate if they work for a period of time. Masu.

But at the moment, Prince said, not many people are talking about a vesting schedule. She wants to throw some spotlight in their direction, she thinks.