When a retirement plan vests, it means that the employee has earned the right to receive the employer's contributions to the plan. Vesting is a process that determines how much of the employer's contributions an employee is entitled to keep if they leave the company before reaching retirement age. There are two main types of vesting schedules: cliff vesting and graded vesting.
Cliff Vesting: With cliff vesting, an employee becomes fully vested in the retirement plan after a certain number of years of service. For example, if the cliff vesting period is five years, an employee who leaves the company before completing five years of service would not be entitled to any of the employer's contributions. However, if the employee completes five years of service, they would become fully vested and would be entitled to keep all of the employer's contributions.
Graded Vesting: With graded vesting, an employee becomes partially vested in the retirement plan over a period of time. For example, if the graded vesting schedule is 20% per year over five years, an employee would become 20% vested after one year of service, 40% vested after two years, and so on. After completing the full vesting period, the employee would be fully vested and entitled to keep all of the employer's contributions.
It's important to note that vesting only applies to the employer's contributions to the retirement plan. The employee's own contributions are always fully vested and belong to the employee. Vesting schedules can vary depending on the retirement plan and the employer's policies, so it's important to review the plan documents or consult with a financial advisor for specific details about vesting in a particular retirement plan.