What is a vesting schedule?

When it comes to choosing an employer-sponsored retirement plan, there’s a lot to consider. What 401(k) or other options do you have to choose from? What percentage of your contribution, if any, is matched? And what does your company’s vesting schedule look like?

A vesting schedule outlines how much employees own the money in their retirement account. Employees may vest a certain percentage of their retirement account each year. Taking the time to understand what vesting means and how it works can help employees better plan for their financial future.

Key takeaways

• Vesting refers to the percentage of an employee’s retirement account that they own.
• Employee contributions are always 100% vested, but employer-matched contributions may not be fully vested until after a certain number of years of service.
• Unvested amounts are not protected and may be revoked by an employer if an employee leaves the company before the end of the vesting period.
• A vesting schedule is a visual representation of the number of years of service and the percentage vested each year.

In retirement planning, vesting is a commonly used term. Vesting means an employee has met the requirements to own a certain amount or percentage of their retirement plan.

With an employer-matched retirement plan, the employer matches an employee’s contribution—up to a certain percentage—each year. While the contributions an employee makes to their plan are always 100% vested, the employer’s matched contributions are not always automatically vested. An employee might need to have a set number of service years for the matched contributions to be 100% vested.

Until an employee is 100% vested, they do not own the full account balance. This means that any unvested amounts can be revoked by an employer if the employee leaves before the vesting period ends. 

When saving for retirement, it’s worth taking advantage of an employer-sponsored retirement fund that offers a match. But it’s important to understand that an employer’s contributions may not be automatically vested. If that’s the case, there is typically a schedule that outlines when these contributions would be considered fully vested.

A vesting schedule is a visual representation of an employee’s vested contributions after a certain number of years of service. This schedule often varies by employer and the type of vesting schedule that the company uses.

Not all employers use the same type of vesting schedule. Two types of vesting schedules are graded vesting and cliff vesting.

Graded vesting

With graded vesting, an employee will gradually build their vested amount until reaching 100%. As an example, an employee could reach 20% vested at two years of service and increase 20% each year until they reach 100% vested in the sixth year.

Cliff vesting

With cliff vesting, an employee is not fully vested until a certain number of years. For example, if an employer has a cliff vesting schedule in place, the employee may remain 0% vested until three years of service, when they will reach 100% vested.

Here’s an example of what a vesting schedule may look like for both cliff and graded vesting.

Investing in an employer-sponsored retirement plan can be a great way to save for the future. While employee contributions are always 100% vested, it’s important to understand that employer contributions may be vested over time. Reviewing your employer’s vesting schedule can help you plan the number of years of service you’ll need before your matched contributions are vested.

Understanding your employer’s vesting schedule could help you to better plan for retirement. You may even find ways to become financially independent and retire early—a lifestyle also known as the FIRE movement.