Why Is My Account Balance and Vested Balance Different?

When reviewing retirement savings, individuals often encounter two distinct figures: an account balance and a vested balance. This can lead to confusion, as it might seem that the full amount saved is not entirely accessible.

Understanding Your Account and Vested Balances

The account balance in a retirement plan represents the total value of all contributions made to the account, including those from the employee and the employer, along with any investment earnings or losses. This figure reflects the overall market value of the retirement assets at a specific point in time.

The vested balance, in contrast, is the portion of the account balance that an employee truly owns and is entitled to keep, even if they leave their employer. The fundamental distinction between these two balances lies in ownership and accessibility, particularly concerning employer contributions.

How Vesting Schedules Operate

Vesting is a process through which an employee gains non-forfeitable rights to employer contributions made to their retirement account over a period of time. Employers often implement vesting schedules to encourage employee retention. The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for these vesting schedules in private sector plans, ensuring certain protections for employees.

There are generally three common types of vesting schedules. Immediate vesting means that employer contributions are 100% owned by the employee as soon as they are made, with no waiting period. Cliff vesting requires an employee to complete a specific period of service, such as three years, before they become 100% vested in all employer contributions at once. For qualified defined contribution plans, ERISA generally allows a maximum cliff vesting period of three years.

Graded vesting, the third type, allows employees to gain ownership of employer contributions incrementally over several years. For example, a plan might vest 20% after two years of service, 40% after three years, and continue gradually until 100% vesting is achieved, typically over five or six years. ERISA generally requires that graded vesting schedules for defined contribution plans result in 100% vesting no later than six years.

Reasons for Balance Discrepancies

The primary reason for a difference between an account balance and a vested balance stems from employer contributions. Employer contributions, such as matching contributions or profit-sharing allocations, are typically subject to the vesting schedules established by the plan. If an employee has not yet completed the required service period under the plan’s vesting schedule, the unvested portion of these employer contributions will not be included in their vested balance, even though they appear in the total account balance.

In contrast, an employee’s own contributions, whether pre-tax or Roth, are always 100% immediately vested. This means the money an employee contributes from their paycheck is always theirs, regardless of how long they remain with the employer. Funds rolled over from a previous qualified retirement plan are also always 100% vested. Additionally, any investment earnings or losses generated by the vested portion of the account are also considered vested. However, earnings on unvested employer contributions typically remain unvested until the underlying contributions themselves vest.

What Your Vested Balance Means for You

The vested balance represents the amount of your retirement savings that is truly yours and portable if you change employers or leave your job before retirement. This figure is what you can take with you, either through a direct rollover to an Individual Retirement Account (IRA) or to a new employer’s qualified retirement plan. Understanding this amount is crucial for financial transitions, as it directly impacts the funds available for future savings or investment.

If an employee separates from service before becoming fully vested, any unvested employer contributions are typically forfeited back to the plan. These forfeited funds are then usually utilized by the plan to reduce future employer contributions or cover administrative expenses, rather than reverting to the employer directly. Regularly monitoring one’s vested balance is a prudent financial practice, especially when considering career changes. The summary plan description, provided by the employer, outlines the specific vesting schedule and helps individuals understand their ownership rights and the implications for their long-term retirement planning.