401k and rolling it over

Typically, engineers will work at an employer for roughly 3 to 5 years. This statistic was relayed to me back in 2007, and I don’t have any indication of whether it’s true or made up. However, due to my own experiences in the work field, it seems to hold somewhat valid as I have been employed by multiple employers and are typically laid off due to lack of available work. In a sense, engineering is simply a “padded” version of the construction industry where gearing up and gearing down in manpower usually happens at a slower scale.

At the end of one of my job opportunities (the company closed their entire Louisiana branch office), the topic of rolling over an employer 401k was never addressed at my dismissal. For a few years, I kept the funds inside the employer’s 401k until I finally got around to rolling it over into a new 401k, rollover account. During the paperwork process, I learned that I had to go back to the original employer and get their “blessing” to have my funds released. Thank goodness some of the same friendly folks that I knew were still employed at that company. Here’s where the kicker part comes into play – Vesting Schedules.

Vesting schedules are set up to reward individuals that stay with a company over a specific course in time. Most employer matches are subject to a vesting schedule. For our example, let’s assume the employer matches 1:1 or 100% of your contribution and has a 5 year vesting schedule set at 20% per year. In our example, let’s say that I contribute $500 per year, the employer matches the $500 per year. Let’s say that the employment opportunity fizzles out right after the 2 year mark. Over the 2 years, you and the company would have a $2000 balance (not taking into account any gains or losses). Due to the vesting schedule, only 40% of the employer match has been achieved. The end result is the employee would walk away with $1400 in a 401k, and the employer would reclaim $600.

One additional consideration that needs examining is the start dates. Companies will have different requirements for their 401k eligibility. Most companies, if it’s offered, will range between 30 days to 1 year. 401k participants should familiarize themselves as to when the vesting schedule starts. Is the start date based on my first day at the company, the day I am eligible for the 401k, or the date of the first paycheck that allocates funds in my 401k account? Depending on the company policy, individuals may be in for a surprise in what they were expecting vs. what they receive if they’ve been heavily matched and subject to the vesting schedule.

As an engineer, the only advice that I can offer is to tell others to be proactive in their retirement savings. Everyone should have some savings. If you have a 401k with a company, you should anticipate rolling it over into a rollover account at the time your employment ends with that specific company. There are numerous companies that offer 401k, rollover accounts, i.e. TD Ameritrade, Schwab, Fidelity, Vanguard, etc.

The reason I mention rollover accounts is the due to the taxes and penalties associate with cashing out a retirement account prior to being eligible for retirement. Although everyone’s situation is different, arm yourself with knowledge to make informed decisions.