When an employer sets up a defined contribution plan, such as a 401(k), 403(b), or another plan, you are able to contribute to the plan. Many times the employer may also choose to contribute an amount toward your account as well. Not all times will the employer contribution be available, if you leave the company.
What Does it Mean to Vest
Vesting refers to the amount of time a participant must work before earning a nonforfeitable right to a retirement benefit. Once the participant is vested, the accrued benefit is retained even if the worker leaves the employer before reaching retirement age. Under ERISA, defined contribution plans are subject to the same vesting rules as defined benefit plans, but vesting schedules vary. Vesting schedules apply only to employer contributions; employee contributions (including pretax contributions) are always 100 percent vested.
Types of Vesting Schedules
Cliff vesting: No vesting occurs until an employee satisfies the service requirements for 100 percent vesting; for example, 5 years.
Graded vesting: Vesting refers to the amount of time a participant must work before earning a nonforfeitable right to a retirement benefit. With graded vesting, an employee's nonforfeitable percentage of employer contributions increases over time, until vesting reaches 100 percent.
Immediate full vesting: Employees are immediately eligible to receive 100 percent of employer contributions.