Being vested in a retirement plan means that you have earned the right to receive the full benefits of the plan, even if you leave your job before retirement. Vesting is a process that determines how much of your employer's contributions to your retirement plan you are entitled to keep if you leave the company. Let me explain how vesting works in retirement plans.
Vesting Schedule:
Most retirement plans have a vesting schedule that specifies how long you need to work for the company before you are fully vested. The vesting schedule can vary depending on the plan and the employer. It is typically based on the number of years of service with the company. For example, a common vesting schedule is 5 years, where you become fully vested after completing 5 years of service.
Cliff Vesting vs. Graded Vesting:
There are two main types of vesting schedules: cliff vesting and graded vesting.
- Cliff Vesting: With cliff vesting, you become fully vested after a certain number of years of service. For example, if your retirement plan has a cliff vesting schedule of 3 years, you would become fully vested after completing 3 years of service. If you leave the company before the cliff vesting period, you would not be entitled to any of the employer's contributions.
- Graded Vesting: With graded vesting, your vesting percentage increases gradually over time. For example, if your retirement plan has a graded vesting schedule of 5 years, you might become 20% vested after 2 years, 40% vested after 3 years, and so on. After completing the full vesting period, you would be fully vested.
Forfeiture of Non-Vested Contributions:
If you leave your job before becoming fully vested, you may forfeit some or all of the employer's contributions that have not yet vested. However, you will always be entitled to keep your own contributions to the retirement plan, as well as any investment earnings on those contributions.
Importance of Vesting:
Vesting is an important aspect of retirement plans because it determines how much money you will be able to take with you if you leave your job before retirement. It incentivizes employees to stay with the company for a certain period of time in order to fully benefit from the employer's contributions.
I hope this explanation helps! Let me know if you have any further questions.