When you review your compensation package, your company match and vesting schedules typically go hand in hand. The company match refers to how much your employer will put into your retirement savings relative to what you put in. The vesting schedule refers to when your employer's contributions truly become yours, although it can also refer to your rights to stock options earned at work.
Some employers choose to match money you deposit in workplace retirement accounts like a 401(k) account or, in smaller organizations, a simplified employee pension, also called an SEP plan. For instance, if your employer offers a 50 percent match on contributions up to 6 percent of your salary, this means that if you save 6 percent of your salary, your employer will put in an additional 3 percent for a total of 9 percent. If you save 3 percent, the employer will only put in an extra 1.5 percent, but if you save 10 percent of your salary, the employer will still only put in an additional 3 percent for a total of 13 percent.
Basics of Vesting
Your employer match isn't always immediately available to you. With some retirement plans -- 401(k)s and pensions -- employers have the right to release the money to you over time. If you're subject to a vesting schedule, it could be up to six years before you earn all of your employer match money. Vesting schedules can also be applied to profit-sharing plans or stock option grants that you receive outside of your retirement savings.
Vesting schedules vary by the type of benefit. If your employers uses an SEP, a Savings Incentive Match Plan for Employees Individual Retirement Account, or a SIMPLE 401(k), federal law requires immediate vesting. With a 401(k) or other defined contribution plan, your employer can let you vest immediately, set up a cliff where you become fully vested after three years, or set up a graded system where you get 20 percent per year starting in year two of your employment. Stock option plans can be set up based on your employer's preference.
An Employer's Perspective
Employers have different reasons for offering matching and vesting. Matching plans are a throwback to when employers used to offer pensions. They also offer some tax benefits relative to straight compensation as well as the chance that, if an employee doesn't save for retirement, the employer won't have to contribute to the matching account. Vesting is useful when undesirable employees leave since the employer gets to pocket the money that it would have spent on the employee's benefits, potentially helping to blunt the cost of replacing the employee. With valued employees, vesting schedules can help to improve retention since a vesting schedule can impose a significant penalty if an employee leaves before she is fully vested.
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