401k Vesting - Strategy?

dragoncar · Post by **dragoncar** » Fri Mar 30, 2012 1:02 am

I get employer contributions that will vest at 20% per year. My question is - how do I invest the unvested funds? It seems like I should go very conservative, since it has a leveraging effect.
For example: I contribute 1k and employer contributes 1k, 0% vested. I invest the 2k then the economy tanks. I lose 50%, plus I lose my job before anything vests. I now have 1k in the account, but my employer takes back 1k, leaving me with $0! Is this right?
On the other hand, say the market doubles, but I lose my job. Then I will end up with 2k.
Seems like vesting skews the risk/reward such that it's best to keep unvested funds in cash equivalents. But if I make it to 5 years, then I'll probably wish it had been invested more aggressively during that time.
Anyone else think this through yet?

Chad · Post by **Chad** » Fri Mar 30, 2012 1:41 am

You would have to look at your plan, but I highly doubt that is the way it works. No company I have ever worked for has worked that way. Usually, the 401k is basically separate accounts for vested and unvested money. When a portion vests it is moved over the vested side. Thus, when you leave only the unvested account is at risk.
If your account is the same as the above only $500 would be in the unvested side. The company would only take that $500 back.

JohnnyH · Post by **JohnnyH** » Fri Mar 30, 2012 1:57 am

haha, never thought about this leverage on the economy doing well you're talking about... I see your point however.
Before making complex decisions you might want to look at your plan's options... My plan has a guaranteed (cash) fund that is still paying close to 3% interest... I couldn't match that elsewhere and deferring the interest tax works for me!
Obviously, max out your matching. I've even thought about doing more, just to get it into that cash option... But decided against it as I prefer liquid money for opportunities as much as possible.
Also watch out for gotchas... My SP option in my retirement has an expense ratio 4x SPY (ETF). It also has a long term bond fund that is playing fast and loose with the books and showing a lot of non-govt income.

dragoncar · Post by **dragoncar** » Fri Mar 30, 2012 3:40 am

Chad, thanks I knew I was missing something. It probably works something like that, although it's not obvious because this is how it's presented:
Source Balance Vested

Employee $X $X

Employer $Y $Z

Total $X+Y $X+Z
The tools aren't very clear either... there's a "transfer" screen and a "rebalance" screen. In "transfer" I can't specify funding source. In "rebalance" I can specify the source, but it still lumps vested cash into the employer source.
So if the system is somehow keeping track of what pot each dollar belongs to, it's not showing up. In other words, I'd still have no idea how to say "only invest unvested funds in X"
Obviously I have to follow up with the administrator. If they are in separate pots (like they should) then there's not as much strategy involved.

jennypenny · Post by **jennypenny** » Fri Mar 30, 2012 3:55 pm

I checked my plan (honestly because your post scared me a little--I'd never thought of that scenario). The money looks like it's all in the same place (i.e. VG Wellington fund), but it has different source codes to tell whether it's company match or not. As the money becomes fully vested the source code changes. You can still tell it's from the company, but it's fully vested. When I look at the main screen however, it just shows all (potential) money in the different funds as if it was fully vested.
Hopefully yours is the same.

dragoncar · Post by **dragoncar** » Sat Mar 31, 2012 1:45 am

Yeah they said I can't separate vested from non-vested employer funds. I.e. there are only two buckets: my contributions, and employer contributions.
So at 20% vesting, if the market drops 20% I lose 100% of my vested cash... and so on.

Chad · Post by **Chad** » Sat Mar 31, 2012 8:45 pm

@dragoncar
"So at 20% vesting, if the market drops 20% I lose 100% of my vested cash... and so on."
Are you completely sure it is that way? I only ask because HR, in my experience, is notoriously poor at communicating this type of stuff, and I have never seen any company do it that way. Are you sure it isn't like this:
Your Money

$1,000
Company Match

$1,000
Market goes down 20% with 20% vested in the company match and you leave:
Your Money

$800
Company Match

$800*20% = $160 you take with you

dragoncar · Post by **dragoncar** » Mon Apr 02, 2012 10:45 pm

No, I'm not sure it's that way. Hopefully it's as you say. It's not a huge amount of money, so I'll probably just pretend it's not there for ERE calculation purposes. The amount of time to go back and forth with the administrator isn't really worth it.

TLV · Post by **TLV** » Wed Apr 04, 2012 10:28 pm

With my 401k, they track the amounts/percentages contributed . So, if you're contributing just enough to get a match and the match is 50%, then 67% of the value of the account is employee-contributed, and 33% is employer-contributed. If you leave before fully vested, then the amount you lose is based on the percentage of the contributions that were employer matching, not on the dollar amount.

dragoncar · Post by **dragoncar** » Tue May 22, 2012 6:44 pm

So let's say I contribute $1000 with $1000 (unvested) match. Market triples, and I leave the company. I get $3000, and company gets $3000? So it's sort of like they are relying on me to invest their money!