Vested or vesting refers to earning control over a financial account. To become vested or to earn vesting an investor must complete, perform or make a commitment in accordance with the vesting rules of a plan. The vesting rules may specify a time of service, years of employment or the length of participation in the plan.
Vesting is a common element of financial investment plans, such as retirement accounts, pension plans, or 401k plans. When participants earn vesting, they gain nonforfeitable control or ownership, completely or partially, over some or all of the funds invested plus all or part of any interest, growth in value or matching funds added to their accounts.
A plan participant earns vesting through a variety of ways. Union retirement plans require union members to work a certain number of hours in a year to gain vesting. A company's 401k plan may require an employee to have continuous employment with the company for a certain number of years to gain vesting. Plans that tie vesting to performance or years of employment typically use a vesting schedule or define a number of vesting credits needed to earn vesting.
There are some plans in which participants earn vesting not only for their own contributions, but also for matching contributions made by their employer. However, this is an extremely rare situation. More commonly, participants earn vesting according to a vesting schedule or by earning vesting credits. There are essentially two types of vesting schedules: graded and cliff. A graded vesting schedule has a graduated scale of vesting levels, such as for one year of service - the participant has zero vesting; after 2 years, he gains 20 percent vesting, and so on. A cliff vesting schedule gets its name from the fact that until a certain point in time or after a certain number of years, the participant becomes 100 percent vested all at once like falling off a cliff.
There are essentially two types of vesting schedules: graded and cliff. A graded vesting schedule has a graduated scale of vesting levels, such as for one year of service - the participant has zero vesting; after 2 years, he gains 20 percent vesting, and so on. A cliff vesting schedule gets its name from the fact that until a certain point in time or after a certain number of years, the participant becomes 100 percent vested all at once like falling off a cliff.
Vesting credits, also called vesting service credits, are a common element in trade and craft union retirement plans as well as many plans covering white collar or professional workers. Regardless of the plan`s type and who its participants are, any plan can use vesting credits to grant vesting. For example, each year that a participant meets certain qualifications, such as working a certain number of hours, the participant gains a vesting credit. After earning a certain number of vesting credits, the participant earns vesting for a certain portion of his retirement funds.
Know Your Plan
If you are a participant in one or more retirement or pension plans, you should know and understand the method by which you earn vesting credits as well as the vesting schedule of each plan. This knowledge is important to your overall retirement planning as well as deciding when the best time to retirement may be. Even the Social Security Administration has a form of vesting based on the age at which you begin to draw payments. So as you begin planning for your retirement, be sure you know your vested position and the funds available to you.
Ron Price, MBA, has extensive senior level experience in business, information technology, and education. Under his pen name Ron Gilster, Price has written over 40 books for several leading publishers on a topics ranging from business and finance to IT certifications to real estate.