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.
The question
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.
Why?
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!
Two years is a long time in your 20s!
That said, most people leave because of their boss. It might be possible to stay in the same system but have a better boss. That will depend on how big your system is to stay on the program (like, do you have to stay at your current job, in your current department, in your current university, or just anyplace in the state you live in?) If you don’t know what else you want to do it might be worth looking into that pool as a whole to see if there’s anything worth applying for that you could try out for a couple of years.
I swear, not all departments have staff/faculty drama. There are functional departments and dysfunctional departments.
But also, there’s a lot of careers out there and a bigger salary profile is going to knock the socks off of any lost 401k matching over 3 years.
I would normally suggest the same thing! But I edited the letter down to keep it brief; Leah actually mentioned having recently changed departments, with no better results. (Actually, it sounds like things got worse!) That made it much easier for me to advise “throw the whole man out.”
This is a small example, but here it goes.
I recently got a job offer, so I’m serving my notice now, then starting at the new place in March (I have stupidly long notice period – this is normal in my sector in the country I live in). When I was job hunting, I knew I had to go, but I was a little bit sad that I’d have to give up some of the perks that I have in the current job. The perks are:
– Because I’ve been here for over 3 years, I have additional holiday days – bringing me up to 27 (from a new starter’s 25).
– For the same reason, I get 20 fully paid sick days. Which is very important to me, because I have a chronic illness that makes seasonal flu/cold fucking brutal.
– Because of recently introduced flexibility, I get to change my work hours to early start and early finish, which I like because I’m a morning person.
But there were other reasons to change jobs, so I waved my perks goodbye and went on a hunt. And the new job? I get 30 days of holidays, 40 fully paid sick days, and my new manager is happy for me to keep my preferred schedule for 4 days a week, and in the one remaining day, I just have to move everything 30min later.
So I think my moral is, you know what you might be losing when you change, but you don’t know what you might be gaining.
Good for you, i’m so glad you found something better!
Thank you! That’s very kind of you to say.
Oh man, what an amazing amount of paid leave. As a contractor right now, I have 0. And even in my former jobs the most new hires ever got was 10 days. I think one company offered 20 days after you’d worked there for like 10 years or something.
It is very generous. I think the legal minimum for holidays is 20 days, and for paid sick leave, they don’t have any legal obligations beyond paying statutory sick pay, which is something like £100 a week.
To be fair, I am in a sector where salaries tend to be on the slightly lower side, but they still have to attract talent. So they go out of their way to offer other benefits. But even taking this into account, I was stunned by the amount of sick leave when I was reading the contract.
An excellent article as usual! Thank your for delving into the behavioral side – it is ultimately more helpful for folks to understand why they feel the way they do. It makes it much easier to address the root feeling instead of just the dollar signs.
I stuck it out at my previous job for two years for two big reasons – one being deferred comp (RSUs that vested annually over three years – which paid for my wedding and funded a lot of my savings goals) and the other being education reimbursement. That job paid for my schooling (around $6k) over those two years which I needed to obtain a new job in a new industry that I love!
Overall, while I did end up in this sweet new career, I will admit that those two years were hell for me. My company left my team in the hell scape that is way too much work and not enough people to do it. I was burnt out, anxious, depressed, and struggling to see the light at the end of the tunnel and then the pandemic happened and it got worse!
Looking back, I could have afforded to pay for the schooling myself but in order to afford the wedding I would have had to find a new job that paid significantly more which given the burn out/stress/anxiety place I was in, I didn’t feel I had the capability to do at the time.
Weird how a job can feel so bad that you don’t have the energy to look for a new one!
Anywho, thank you for doing what y’all do. You are rocking it!
“Weird how a job can feel so bad that you don’t have the energy to look for a new one!”
THIS, THIS, 100% THIS. The mental toll of shitty jobs are SERIOUS BUSINESS. They affect everything in your life.
I agree with NicoleAndMaggie’s last comment. To run the numbers, Leah’s portion of her 401k is about $20k right now, and $10k is unvested (I’m assuming that takes into account any partial vesting from a schedule, so I’m taking that number at face value). That’s over 3 years, so there has been some growth, which means Leah probably contributed somewhere between $4k/year and $7k/yr. That means that Leah is NOWHERE NEAR the limit on 401k contributions.
So if Leah finds a new job that pays $5k more per year, she could choose to make absolutely no changes to her budget for two years and sock that much extra in her 401k (of her OWN money). Then after two years she’s pretty even to where she would be, but oh by the way she is still making more money. If she found a job that pays $10k more, she could spend one year making back her lost matching contributions, and then keep getting paid more money!
But here’s the other side of that: if she found a job that she likes more and pays exactly the same, so *poof* that $10k match is gone forever… by the time she hits 55, “the money that never was” will have grown (assuming a real growth of 5% per year) to about $40k. Whereas (assuming that same real growth and annual 401k ongoing contributions of $5k) her OWN contributions would be about $420k. If we change that assumption of about $5k per year to go up by $1k each year (after accounting for inflation… up to a limit of putting away $20k in today’s dollars 15 years from now), then her OWN contributions would have grown to about $1M.
Leaving now for happiness and more potential career growth – that is, NO SALARY BUMP – is worth it in terms of loving yourself and your life and also saving for retirement. If you get a salary bump as well, then it gets even better.
Great information! I’m not looking to change jobs at the moment, but I have had it in the back of my mind that I would have to walk away from stock-based compensation if I ever did. My company adds new stock with a 5 year vesting schedule each year, so that carrot is always going to remain.
One minor point regarding the bonus taxation – while your employer does withhold taxes at a higher rate on bonuses, the actual tax rate calculated when you file taxes at the end of the year is your normal tax rate. Your employer has the choice of using the maximum rate or a special formula for estimating a correct rate (still typically a higher rate than normal), most choose the maximum rate because it is easier.
It sucks to see such a big bite taken from your bonus check, but it reduces the risk of people owning taxes at the end of the year. Instead you either get a refund or a smaller tax bill.
I didn’t know that about bonus taxation! That explains quite a bit about my tax refunds in recent years.
Thanks! Came here to say the same thing about bonus tax rates. Saved me some time 🙂
As a fellow horrifically underpaid public university employee – all of the above. The lovely thing about being a university employee though, is that you can continually job-hop departments until you find a good one. Treat them like the pokemon they are, and catch as many as you can – nabbing a 3% wage increase each time.
The benefit to me for staying at the university I’m at is the union protection. I live in an at-will state, but my union benefits dictate that I can only be let go with sufficient, documented cause. As a solo parent, not being fired on a whim is crazy important to me. So while I currently have a superbly awful boss, I’m moving departments in a few weeks. I’m giving up a job that I enjoy with people I like to expand my abilities and shake off the hellscape that is a department in the middle of a crash and burn. And I can keep all of my perks and investments.
Of course, everyone needs to do what is best for their own lives; staying where I can’t be fired because someone doesn’t like my RBF (true story) is important to me.
It seems like state/public institutions have worse vesting options than many corporate ones. My state changed from a 5 year vesting to 10 year vesting (not incremental) the year I started. That immediately gave me no plans to ‘hang in there’ unless I really wanted to. Most businesses tend to have a more favorable vesting option – my last one didn’t contribute until your 1 yr anniversary but after that you were fully vested. Another one vested incrementally over time – 20-25% a year, so you received something if you were there at least a year.
Unless she can find something that really appeals in the same system (i.e. sometimes university systems are related to state retirement systems if they are public) it is not worth sticking it out for 2 more years. That’s a lot.
While many corporations do better on retirement – their ‘golden handcuffs’ tend to be deferred Stock options that vest over time. My last company it was 25% over 4 years. It’s fine if you like your company and plan to stay anyway but otherwise it sucks. My manager thought I would be happier about my ‘award’ but what’s to be happy about something you can’t cash out – except in small bits over the next 4 years??? (And it wasn’t that much.) I would have been much happier if it was a cash bonus but companies loooove to string you along.
Hi BGR,
This article says that bonuses are /taxed/ at a higher rate than the rest of your salary, but I don’t think that’s true. Bonuses are /withheld/ at a higher rate, yes, but doesn’t this even out when you file your taxes? If you’ve overpaid on taxes (whether that be on bonuses or your regular withholdings), won’t you get a refund for the amount you overpaid?
Seconding this. Bonuses are withheld at a higher rate, but are taxed just like other income. The article linked also notes this, although for whatever reason seems to be fairly misleading in its highlights section.
Uggghhh, I had such a similar experience at my first full time job out of college! It was a shitty place to work (Family owned independent yellow pages publisher) and they also had a 5 year vestment for their 401k matching. I did all the right things! I maxed out that matching by investing 6% to get their 3%!
But it turns out, even 6% of a terrible, terrible low wage is hardly anything! I ended up leaving after 4 years, so I lost most of their match, and I ended up in an equally terrible job. HOWEVER! I still think it was the right thing to do, and I agree with the article’s advice to GO GO GO. Your mental health is SO IMPORTANT. You cannot put a price on that. It leaks into _everything_ else.
Now that I have years more of experience, and this article, I can now recognize these scams for what they are and avoid them if possible, or at least weigh their financial implications more accurately.
‘Vested’ pension funds are such crap. In the UK, any matched funds are deposited into your pension account along with the amount you invested. Full stop. None of this takesie backsies.
OP, yes, 10k is a lot. You get that over 5 years, so 2k per year. If you earned 20% more, you’d get that 10k in 4 years, 1 year faster. Cut your losses and get a better role that pays more.
Here is my vote for “short-term, strategic quit-timing good – long-term gritting out horrible situations bad” from personal experience:
I was badly underpaid in a job I hated with people who were loudly racist, homophobic, or otherwise generally AWFUL in my immediate space. I had vaguely thought about going back to grad school.
Then I found out I was pregnant, and my mentor very bluntly told me, “If you want to keep that baby, get the HELL out of that job, woman! You’re going to stress yourself right into a miscarriage there!”
I registered for two grad school classes in non-matriculated status, got my mentor (who had nothing to do with that job) plus one decent manager from that job and a third reference I’ve now forgotten to be part of my official application, and timed my quit for early February. It was right after the semester started, I’d still have most of the month before my health insurance lapsed, and I’d get the payout for my vacation bank that had rolled over in January, which would give us just enough money to make this entire scheme work out okay.
About a week after I quit that job, I had a serious miscarriage scare – thankfully, the baby turned out to be okay (he’s a teenager now). I got Medicaid and WIC and student loans and my husband also went back to school and took two part-time jobs. Then I graduated and got an offer for a job that paid just barely less than what my husband and I had been making COMBINED, full-time, and had extremely good health insurance coverage in a way that was specifically relevant to our situation at the time. This job wouldn’t have been an option without my shiny new degree.
So that was a short strategic wait that was the right thing to do to set a lot of good things in motion. But it was also a cautionary tale because if I’d waited any longer I might very well have lost the baby, and even if not, trying to recover from that scare while working at a job where the people were horrible would have been…Very Bad.
I wish I could send this article to my younger self. It would’ve changed the direction of her life.
So I like to think, at least. Maybe graduating uni a few years after the Great Recession hit was always gonna put me in a terrible place in terms of career, but I think my choices to stay, to play safe, to follow rules, to “work hard and you’ll be rewarded!” like capitalism says…those contributed. If I’d been more cutthroat and less patient, I would be in SUCH a better place right now, and it’s something I may always regret.
People were always saying young people were impatient and disloyal, constantly job-hopping… It was said in a judge-y voice, so I determined I wouldn’t be one of those people! And now I’m in my early thirties, 30k total retirement, living with my parents, still haven’t had a job that doesn’t pay by the hour…
Fuck the system.
I’m so grateful you two badass superheroes are out there helping the next gen do it right. You guys are seriously wonderful. You’ve changed ways I interview, quit, work, plan, buy, and save, and done the same for so many other readers too. THANK YOU.