Understanding Graduated Vesting

by Investing School on March 22, 2013

Benefits, which increase as an employee accrues more time at a company, fall under the category of graduated vesting. Federal law mandates a vesting schedule, but a graduated approach may be chosen by employers for the portion they contribute to private retirement plans.

When a graduated vesting schedule is used, the employer’s contribution vests over several years. For example, any contribution made by the company may be 20% vested after one year, 40% after 2 or 3 years and so forth until the whole amount is fully vested. If the employee leaves before the vesting schedule is complete they will retain their full contributions but only the vested portion of the employer’s deposits.

Such a plan encourages employees to remain with a company for the entire period until their employer’s contributions become fully vested. The advantage of a graduated vesting schedule goes both ways. The employer doesn’t lose the total amount contributed if the employee leaves before complete vesting while the employee doesn’t lose all the funds contributed by their employer either. Gradual vesting can also encourage good work performance, if used properly.

Once an employee reaches the point where their retirement account is fully vested they can leave their present employment and take all the funds in their account with them. Some companies won’t vest at all until a number of years have been served. This can cause discontent among employees who feel that they, and their pension funds, are being held hostage in some sense. The graduated option eliminates the “all or nothing” scenario.

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