How Vesting Impacts You & Your Retirement Account
In today’s market, we are all hearing alot about employer-sponsored retirement plans and how they are impacted by factors such as layoffs. In the event that you leave or are separated from your employer, the amount of money that you take with you may be subject to the amount of time that you’ve been with that employer.
Some plans offer a profit sharing or company matching contributions, which is money invested on your behalf. The amount of these contributions is usually based on a pre-set formula (e.g. 50% of the amount you contribute up to 6% of your pay); however, certain requirements may have to be met prior to being entitled to this money. This is called vesting, which is the amount of time it takes for you to earn a non-forfeitable right to contributions made by your employer.
There are three common types of vesting and different rules you need to be aware of for each. The common names and definitions for the types of vesting include:
- Immediately Vested: You are immediately entitled to any contributions your employer makes to your account. You will be able to keep whatever they contribute to your account no matter how long you worked for the company. The portion vested cannot be reclaimed by your employer.
- Graduated or Graded Vesting: As the name implies you gradually earn a larger percentage of the money contributed by your employer. This schedule allows workers to become 20% vested after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years of service. An example of a graded vesting schedule would be:
|
Years of vesting service you have completed. |
Percentage of your accrued benefit that is vested. |
|
Less than 1 year |
0% |
|
At least 1 but less than 2 years |
20% |
|
At least 2 but less than 3 years |
40% |
|
At least 3 but less than 4 years |
60% |
|
At least 4 but less than 5 years |
80% |
|
At least 5 years |
100% |
Note: not all companies with graded vesting schedules are six years. This is just one of the most common schedules.
- Cliff Vesting: This schedule is similar to being immediately invested; however, you still need to work a certain period of time to receive the benefit. Cliff vesting allows you to be fully vested only after a set time period. For example, your plan might require you to work three years prior to you being eligible to receive the company match. If you worked two and a half years, you would not receive your company match. If you left employment any time after the three year requirement, you would be receive 100% of the match.
If you have any questions regarding what type of vesting schedule your plan has I’d suggest contacting your benefits/HR manager or retirement plan representative.
If you have any other questions, please feel free to contact me directly at jstudebaker@smart401k.com. If I can’t help you find the answer you need, I will try to help you determine whom you should contact and the questions you should ask.
Jeff Studebaker, Investment Advisor
