Nothing Now, Less LaterWhen you change jobs, you won't be immediately enrolled in your new company's defined-benefit or defined-contribution plan. "About half the companies make you wait a year," says David Wray, president of the Profit Sharing/401(k) Council of America, a nonprofit association of companies that sponsor 401(k) plans. "That means there'll be a year where you can't contribute to the plan, so you need to make sure that you're contributing to an IRA in the meantime." Under a defined-benefit plan, also known as a pension, you receive a portion of your salary from the company after you retire. Under a defined-contribution plan, or a 401(k) plan, you allot the amount you want to save for retirement, while the company may match what you put in -- or not. If your company does match your contributions in any way, consider yourself lucky. Because of the recession, many major companies such as Ford, DaimlerChrysler and Bethlehem Steel have stopped matching employee contributions to 401(k) plans. "You go back five years ago, and
|Retirement Savings |
Older and shrinking
|Age||Avg. 401(k) Account Balance 1999||Avg. 401(k) Account Balance 2000||% Annual Change|
No matter what kind of retirement plan you have -- a defined-contribution plan or a defined-benefit plan -- they all vest in one of three ways: cliff, grade or immediate vesting. Cliff vesting is an "all or nothing" scenario. An employer's contribution to your retirement doesn't count until you work a set amount of time, typically four years. "If you left before the four years, you would get nothing," says Craig Copeland, senior research associate for the EBRI. Grade, or gradual, vesting is an "all or something" scenario. In other words, benefits are accumulated over time -- typically five years. Under a five-year plan, an employer matches one-fifth or 20% of your first-year contribution. A fifth is added every year until year five, when the company match reaches 100%. So if you had $10,000 saved after four years, your employer would match only 80%, or $8,000. You lose $2,000 by leaving a year before you're fully vested. Immediate vesting is just what it sounds like. All employer contributions count 100% on the first day of your new job. "There's no retirement loss from changing jobs," says Copeland. "You know right away what you're going to get." But such plans are uncommon. Copeland says that 96% of all defined-benefit plans use cliff vesting, 3% use gradual and only 1% use immediate. For defined-contribution plans, Copeland says a third vest immediately, another third use cliff vesting and the final third use grade vesting. "It is wise to understand what you actually get when you leave," he says.