Today we’re answering a question from a Patreon donor about unvested funds.
And if you hear the phrase “unvested funds” and picture a pile of money dressed like Aladdin minus the purple vest, it’s okay! THAT IS ALSO HOW MY BRAIN BE! You are safe here.
Basically, Patron Leah is stuck working for an employer who’s promised her financial compensation. But later. Like, years later. And since she doesn’t like her job, she’s got to weigh whether it’s smarter to walk away now, or stick it out until she gets the money she deserves.
This is an unexpectedly tricky question. There’s a financially “right” thing to do, and an emotionally “right” thing to do—and they do not agree with each other at all. TYPICAL.
But rest assured, I’ve got strong opinions and I’m here to use ’em! So let’s get into it.
Tall drink of community-minded financial backer Leah writes…
I work at a public university. I’ve given it my all for three years, but I hate my boss, and my core job duties were totally misrepresented to me. (I spent a week crying because of how overwhelmed I was with new duties I had zero experience or training in!) I really want to leave, because I’m tired of academia and staff versus faculty dynamics.
The trouble is that I’m 2 years away from my employer contributions fully vesting. My university has a great 401(k) matching plan, but the employer contributions don’t vest until I’ve been there for 5 years.
Public university employees in my state are notoriously underpaid, and while I’m only 26, I really want to grow my salary and there’s no room for negotiation here. How much of a pay raise would I need to be okay to leave around $10k of employer retirement investments? (That’s 1/3 of my current retirement savings.)
Thank you for all that you do, I’ve learned so much!– Leah, through Patreon DM
Well, gosh, thank YOU Leah! We so appreciate your support. It helps us pay our assistant a fair hourly wage.
And pay ourselves, I guess, lmao. If you’re dying to know how much Piggy and I make off BGR for every hour of work we put into it, here is your answer:
How vested and unvested funds work
Let’s break this down. Leah’s employer has agreed to contribute money to her 401(k) retirement account.
But the money only vests (becomes truly hers) after five years.
Before that time, it will be unvested or not fully vested, depending on the vesting schedule.
Which is a very rococo way of saying the money ain’t hers yet. If she leaves the company before it’s scheduled to vest, the money will be taken back out of her account.
How deferred compensation works
Funds that vest on a schedule are a form of deferred compensation.
In Leah’s case, it’s the employer matching portion of her 401(k) retirement funds. But it’s a popular way for companies to incentivize employees to stay. Other forms include…
- Matching retirement funds
- Employee stock options
- Retention bonuses
- Annual bonuses
- Anniversary bonuses or gifts
- Increased paid vacation time
- Eligibility for sabbaticals, tuition reimbursement, and other substantial perks
All of these things sound nice. But they actually suck.
Deferred compensation is what I call Santa Claus Money.
“If you’re a very goodlittle girl and you work very hard for very little money, eventually a jolly man will slide down your chimney and give you the money you, uh, already earned!”
That trick worked on me when I was young and dumb and had a bottomless hunger for more Puppy Surprise dolls. But not any longer!
Santa Claus isn’t coming, and neither is your money
There are so many hidden reasons why that kind of money is unreliable.
- You may not like your job. In fact, I think companies that focus on deferred compensation rewards probably do so because they know damn well they’re a crappy place to work!
- You may not be able to work. What happens if you get sick, fall pregnant, or need to take time off to be a caregiver for someone else? That money won’t be there when you most need it. (Also, I’m really sorry I said “fall pregnant.” I’ve been watching the BBC.)
- You may get fired. For Americans, the ERISA Act makes it illegal to fire an employee in order to avoid vesting their retirement funds. But you would have to bring your former employer to court, where their lawyers would swear up and down it was a coincidence and you were let go for other reasons—or for no reason. Which is perfectly legal.
- Your income will stagnate. In the months (or years) it takes for Santa Claus to arrive with your hard-won money, your income is flatlining. The average internal raise is 3%. But if you leave and go to a new company, it’s 15-20%. And sometimes MUCH more. For more on that, read our legendary articles on job hopping here and here.
- They aren’t worth as much as they seem. Bonuses are taxed at a higher rate than salaries. You’ll lose a quarter of their value before they even cut the check.
- They aren’t reliable. During the pandemic, my company unilaterally suspended 401(k) matching and bonuses. They did it so they wouldn’t have to lay people off—which I’m totally okay with. But shit happens! If your company has a bad year, or the economy tanks, Santa might not come.
For these reasons, my opinion is that compensation delayed is compensation denied.
Great benefits are great from day one
When Leah said the following, I confess to whipping my glasses off like a TV doctor and pinching the bridge of my nose.
My university has a great 401(k) matching plan, but the employer contributions don’t vest until I’ve been there for 5 years.
Leah’s university DOES NOT have a great 401(k) matching plan!
Her university may offer a nice percentage—but they’ve cleverly made it so that they rarely have to actually cough if up. The average worker only spends 4 years at their job. I can’t imagine her employers don’t know that. Their retirement perks are intentionally designed to sound great. But I bet any job with a lower percentage match but a 12- or 24-month vesting schedule (which is more typical) ends up paying its employees more.
For context, my partner just started a new job. In his first two months, that company gave him a signing bonus, a home office stipend, a personal development stipend, an “employee happiness” stipend, and a Christmas gift.
Which do you think he feels: trapped, like Leah? Or wanted?
Why it’s so hard to walk away
It’s my opinion that Leah’s best course of action is to walk away now.
Leah doesn’t just dislike her job—she dislikes her entire industry. She’s under-compensated, under-appreciated, and describes crying in frustration at her desk. That is not how life should be!
So what if you have unvested funds? $10,000 is a lot of money, yes… but it’s too little money for spending two years sobbing at a dead-end job.
Especially when you consider that you won’t have access to that $10,000 for another fifty years! I don’t know what Future Leah will be like when she’s of traditional retirement age. But I have hopes she will be a wise and generous GILF. I don’t think Future Leah would be happy to know that Present Leah spent some of the best years of her life suffering to give her a few thousand bucks.
Besides, the planet will be a supermassive air fryer by then anyway!
So fucking YOLO, Present Leah! Get the fuck out of there! You have your whole life left to make up a relatively small difference.
Deferred compensation is a solid trick
That said, I know from personal experience that it’s easier said than done.
I’m a hypocrite. I’ve been in this situation myself. Stuck in a job I hated, waiting it out to collect vesting funds, retention bonuses, or at least harvest a fresh crop of paid vacation days. For me, walking away from the promise of future money is like telling Nemo not to open the Nightmare Door. Gonna do it! And we’re all gonna have nightmares about it for years!
As I take stock of all of those decisions, I acknowledge that they were almost always to my detriment. So I’m going to do my best to convince Leah, and everyone else reading this, not to make the same mistakes I’ve made.
Employers offer these perks because, psychologically, they work.
There are two concepts in behavioral economics I want to explain to you.Understanding how they work will help you develop the vital skill of walking away.
Helpful concept #1: The sunk cost fallacy
The first concept is called the sunk cost fallacy.
The sunk cost fallacy describes the phenomenon of people being reluctant to abandon a strategy or course of action because they’ve invested in it—even when it’s clear that the investment is no longer the best thing to do.
Basically, we “throw good money after bad.” And by doing so, we make a bad decision last longer, and leave deeper impacts upon our lives.
An example of the sunk cost fallacy
Here’s an example:
Let’s say you’ve been working really hard recently, and you’ve got one evening set aside for yourself. You decide to go and see a movie. You drive to the fancy theatre with comfy reclining seats and pop open the outside snacks you frugally smuggled inside. As the lights dim, you feel relaxed, excited, and ready to be transported.
And then a fucking awful movie starts playing.
(For my own purposes, I’m imagining it’s Darren Aronofsky’s preposterous mother! But obviously this is a very personal choice, so leave a comment below with yours!)
The rational thing to do is stand up and leave. This is your night off. Your time is precious. Once it becomes clear that you’re not going to have fun, you should stop investing your time in the lack of fun and go do anything else.
But most people won’t leave. Instead, they’ll spend another two hours continuing to do something they hate. Instead of wasting $20 and 20 minutes, they’ll waste $20 and 121 minutes.
How it makes us keep sinking
I see a handful of motivating feelings at the heart of this irrational decision.
- Misplaced optimism. “Maybe the beginning of the movie is weak, but the ending is amazing…?”
- Fear of missing out (FOMO). “Everybody is gonna see this movie. I want to at least be able to talk about it.”
- Lack of confidence in yourself. “Maybe I’m a philistine and this movie is actually incredible?!”
- Plan continuation bias. “I was looking forward to this! I hit up the CVS for Peanut Butter M&Ms for this!”
- Unwillingness to fully confront your mistake. “The reviews were good. He made The Wrestler. I don’t understand why this is happening to me!”
- Capitalist brainwashing. “I should make the most efficient decision, not the most enjoyable decision. Beep boop, beep boop!”
Remember, the ultimate currency of your life isn’t money—it’s time! Ideally, your money will become a tool to protect your time. It should never be the other way around. You can always make more money, but you cannot buy back lost time.
Hey—that’s also the tl;dr for Citizen Kane! Saved you two hours. You’re welcome.
Helpful concept #2: Loss aversion
Loss aversion is another fancy behavioral economics term. It refers to the phenomenon that it hurts us more, psychologically, to lose than it feels good to gain.
Losing feels worse than winning feels good.
An example of loss aversion
Let me present you with two hypothetical situations. You have to choose to live one of them.
- Option 1: A pickpocket steals the cash out of your wallet, a whole $19. On the way to file a police report, you find a $20 bill on the ground, which you may blamelessly keep for yourself.
- Option 2: The theft never happens. You keep the $19 safe in your wallet, but you also never find the $20 bill.
Rationally, you should choose the first option. You end up $1 richer. It’s the better financial decision.
But I think most people would much rather have the second option. If you’ve never been robbed, let me tell you—it’s a terrible feeling! It seriously sucks to have something that’s yours taken away. It’s upsetting and violating. So avoiding the loss altogether is the better emotional decision.
How it makes us keep losing
This is why folks in a situation like Leah’s find it really hard to walk away from deferred compensation. Emotionally, it feels like that money is already yours. So it emotionally stings to leave it unclaimed.
But here’s the reality: unvested funds are not yours! The word “vest” literally means ownership! That money is unowned by you.
But you’d never know that, based on how your employer frames it! They talk about it as a sure thing, and have devised a complex system that allows you to see the money sitting in an account with your name on it. Perhaps I’m cynical, but I think it’s a carrot dangling on a stick. Its purpose is not to feed you, but to encourage you to overwork yourself based on promises of future rewards that may never come.
Here’s my trick for handling deferred compensation benefits: pretend they don’t exist. I never plan to get any of that extra money. I do not factor them into my decision to accept a job offer.
If an employer wants a juicy bite of the golden apple that is my shining genius, they need to pay me. In money and benefits I can use right now. I will not accept boxes labeled “do not open ’til X-Mas!”
And neither should you.
How to mitigate the loss of unvested funds
If you find yourself needing to leave a job with unvested funds, there are a few technical tricks you can try to mitigate your losses. Consult your plan’s terms and vesting schedule.
- Can you stick it out? I mostly skipped over this because Leah made it so obvious this field is not her future. But obviously, if your funds are fully vesting in three weeks, make like a kitten poster and HANG IN THERE, BABY! I’m not opposed to being mercenary if means a big reward for a small investment of time.
- Are your funds partially vested? A lot of plans with a long vestment cycle (like Leah’s) step up vestment gradually. This is called a grading vestment. Getting 100% of what you’re owed is ideal. But getting 60% of what you’re owed sure beats 0%.
- Can you time your departure strategically? If your vestment percentage steps up at the new year, or at your hiring anniversary, could you plan your departure right after?
- Is there a partial plan termination? There is a special rule for employers that may require them to honor their full match even if you’ve been laid off before their scheduled vestment. It was complicated before, and it’s changed even more since being altered by pandemic relief bills. But basically, it’s triggered if your company has laid off 20% or more of its workforce. Worth investigating to see if your situation applies!
- How much would it take to make up the difference? I find it very empowering to calculate exactly how much your employer is offering you. Then, figure out how much you would need to make elsewhere to make up the difference. They say a bird in the hand is worth two in the bush. But if the bird in your hand sucks shit and the bushes are thick with fat, glossy, handsome birds lining up to peck seeds out of your open palm, you can safely let it go. Read our tips on turning the so-called labor shortage to your advantage before you decide.
Loyal readers, have you ever stayed in a job just to collect a perk? Do you regret it? Or was it the right choice for you? Please let us know in the comments below!
And if you dream of having your burning question turned into a Bitches Get Riches article or podcast episode, join the ranks of our Patreon donors!