Employer 401k contribution taken back after 5 years of leaving the employer.

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oregoncopflier
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by oregoncopflier »

Marylander1 wrote: Wed Jan 12, 2022 10:17 pm
oregoncopflier wrote: Wed Jan 12, 2022 10:05 pm It happened to me at a previous employer. While legal, it definitely created a lot of ill-will on my part for a trivial amount of savings on their part. In my opinion, any employer who does not immediately vest retirement match for their employees should re-think the practice. That's spoken as someone who has hired 75+ employees at my company and never considered anything except instant vesting.
I'm curious: for a defined benefit pension plan, would you also expect instant vesting? I suspect the concept started there and transferred to defined contribution plans like 401ks.

I'm imagining someone young who works for a week before quitting, and under an instant vesting pension is eligible for 43 cents per month when they retire

Marylander1
You're probably right about the background of where this comes from. I think anyone who has joined the workforce during the Defined Contribution era sees delayed vesting as a misleading and penny-pinching practice on the part of employers, even if that wasn't the intent.
zeeke42
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by zeeke42 »

Now that many 401k plans have brokerage windows, I've often considered if it may be worth it in some situations to specifically invest the unvested balances on high risk/high reward individual stocks (or even options/leverage/etc if your plan is crazy enough to allow them).

In other words, say you have a job you're on the fence about leaving. You have a match amount that vests in 2 years. You put it all on TSLA puts or something. If you make a huge return, cash it out, and stick out the job for 2 years. If they expire worthless, you leave and your lottery tickets effectively cost you nothing.
Jags4186
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by Jags4186 »

zeeke42 wrote: Thu Jan 13, 2022 10:10 am Now that many 401k plans have brokerage windows, I've often considered if it may be worth it in some situations to specifically invest the unvested balances on high risk/high reward individual stocks (or even options/leverage/etc if your plan is crazy enough to allow them).

In other words, say you have a job you're on the fence about leaving. You have a match amount that vests in 2 years. You put it all on TSLA puts or something. If you make a huge return, cash it out, and stick out the job for 2 years. If they expire worthless, you leave and your lottery tickets effectively cost you nothing.
I don’t believe you can segregate your vested money from your unvested money. It’s simply proportional. If you contribute $9000 and the company contributes $1000 un-vested money and the overall account value grows to $20,000 they are taking $2000 back if you leave. Likewise, if the account drops to $5000 they’re only taking back $500.
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

exodusNH wrote: Wed Jan 12, 2022 6:57 pm [...]
You benefit from the gains. I assume the money they remove is the value they put in, not what it has grown to. (Or, in a bad environment, shrunk to, which would hurt.)
[...]
You assume wrong, of course (maybe I shouldn't say the "of course" part, as that makes me judgemental :oops: )

In other words, let's say you are 100% stocks in your entire 401k. It has 20% unvested money. If the 401k grows from $100k to $200k, the unvested portion grows from $20k to $40k.

Maybe this is not normal, but all of my 401k custodians have provided the option of separately treating 401k balances by source. Therefore, for instance, I could go all in 100% stocks with my contributions and keep all of employer's contribution in cash (should I wish to do so).
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

Jags4186 wrote: Thu Jan 13, 2022 10:22 am [...]
I don’t believe you can segregate your vested money from your unvested money.
[...]
Depending on custodian, you absolutely can (not vested vs unvested, but by contribution source - employee vs employer). Please refer to my response above.
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

MrJedi wrote: Wed Jan 12, 2022 7:18 pm The plans I've been a part of, both vested and non vested balances are shown. All sources are clearly tracked (i.e. employer match has a separate source/bucket). Everything is invested as you elect, and when a non vested amount is forfeited, all contributions and earnings (if any) from that source are taken out.
This!
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

SpideyIndexer wrote: Wed Jan 12, 2022 8:59 pm Is the vesting period normally for how long one remains employed after each match amount is contributed by the employer? So if he or she leaves, and the vesting period is 3 years, he or she would lose the only employer matches made within 3 years of the termination date?

Also, is this clawback normally not performed if the employee officially retires? That would seem rather nasty thing to be done in a retirement plan.
Each company's plan is different. The onus is on the employee to be aware of what's going on. Information is always available - some plans might make it more difficult than others to get it though. :oops:
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

MrJedi wrote: Wed Jan 12, 2022 9:59 pm Yes, I would imagine the entire point of a vesting schedule is typically to help retain employees for that duration. I don't think there is anything misleading about it as long as vested vs unvested is clearly marked. IMO the onus is on the employee to understand what vested and unvested mean. I don't think that's unreasonable.

I have not seen a plan that does not allow investment of unvested amounts, that would irritate me knowing there is dead cash sitting there.
+1 again!
exodusNH
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by exodusNH »

an_asker wrote: Thu Jan 13, 2022 10:31 am
exodusNH wrote: Wed Jan 12, 2022 6:57 pm [...]
You benefit from the gains. I assume the money they remove is the value they put in, not what it has grown to. (Or, in a bad environment, shrunk to, which would hurt.)
[...]
You assume wrong, of course (maybe I shouldn't say the "of course" part, as that makes me judgemental :oops: )

In other words, let's say you are 100% stocks in your entire 401k. It has 20% unvested money. If the 401k grows from $100k to $200k, the unvested portion grows from $20k to $40k.

Maybe this is not normal, but all of my 401k custodians have provided the option of separately treating 401k balances by source. Therefore, for instance, I could go all in 100% stocks with my contributions and keep all of employer's contribution in cash (should I wish to do so).
Well, if my assumption was wrong, then I deserve it! My employer contributions are immediately vested because of the Safe Harbor provisions. I do see that they're tracked differently, including a $120 qualified non-elective contribution. It didn't occur to me that you could manipulate unvested money separately.
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rob
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by rob »

an_asker wrote: Thu Jan 13, 2022 10:31 am Maybe this is not normal, but all of my 401k custodians have provided the option of separately treating 401k balances by source. Therefore, for instance, I could go all in 100% stocks with my contributions and keep all of employer's contribution in cash (should I wish to do so).
I've never had a plan that allows this.... If you do then I'm shocked but in that case this might make sense.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
an_asker
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by an_asker »

exodusNH wrote: Thu Jan 13, 2022 11:03 am [...]
Well, if my assumption was wrong, then I deserve it! My employer contributions are immediately vested because of the Safe Harbor provisions. I do see that they're tracked differently, including a $120 qualified non-elective contribution. It didn't occur to me that you could manipulate unvested money separately.
I'm also currently on a Safe Harbor plan (but it wasn't always like this - earlier on, we had 1+% ER funds!!). :sharebeer
exodusNH
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by exodusNH »

an_asker wrote: Thu Jan 13, 2022 11:24 am
exodusNH wrote: Thu Jan 13, 2022 11:03 am [...]
Well, if my assumption was wrong, then I deserve it! My employer contributions are immediately vested because of the Safe Harbor provisions. I do see that they're tracked differently, including a $120 qualified non-elective contribution. It didn't occur to me that you could manipulate unvested money separately.
I'm also currently on a Safe Harbor plan (but it wasn't always like this - earlier on, we had 1+% ER funds!!). :sharebeer
We've been Safe Harbor for a while now. (Needed to avoid top-heavy issues.) But until later in 2019, we were paying for the plan administration by relying on the funds' revenue sharing with the advisor/custodian. I don't remember that we had anything over 1%, but they were much higher than what you could get from Vanguard or Fidelity.
autolycus
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Re: Employer 401k contribution taken back after 5 years of leaving the employer.

Post by autolycus »

A few points that have maybe been missed or are worth clarifying for this thread:

1) The idea of benefit vesting has existed since the advent of retirement plans. The goal is obvious and straightforward: to entice employees to stay at the employer longer. Pre-ERISA (1974), a company could set whatever vesting timeline they wanted. Post-ERISA, the maximum vesting schedule has crept lower and lower and currently sits at either a 3-year cliff (0% vested until 3 years of service then instantly 100%) or 6-year graded (20% after 2 years, 40% after 3, 60% after 4, 80% after 5, 100% after 6). Plans can have faster vesting, but they cannot vest slower than one of those schedules. So a plan could have a 2-year cliff or a 4-year graded. The vesting schedule is in the Plan Document and the Summary Plan Description.

2) Plans are required to disclose to the participant what portion of their balance is vested. It should be pretty clear to anyone who understands the word "vest", but many participants do not understand that term.

3) Unvested balances belong to the plan, not the employer. The employer must use unvested amounts for the plan. There are several permissible ways for the plan to use those funds, and the plan document ultimately governs which specific ones will be used. The 3 most common uses (subject to allowance within the specific plan's document): 1) Pay plan expenses 2) Allocate to other participants on a pro-rata basis 3) Offset future required employer contributions.

4) Plans have a wide variety of approaches for how employer contributions are invested. This includes different approaches to vested and unvested portions of an account. Some are quite restrictive in this area. Others are not.

5) The reason for the delay of 5 years (that's on the long side, honestly) is that a participant who restarts service within 1 year of separation must have unvested benefits reinstated. This rule mostly benefits seasonal employees, but it also prevents companies from doing really shady crap like terminating an employee right before they vest and then hiring them back immediately just to prevent the employee from vesting. It's significantly simpler to administrate the unvested balances if they just leave them sitting for at least that year. Using the money for another allowed purpose and then having to add it back is a royal pain.
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