What is Vesting?

by Investing School on April 18, 2011

The term “Vesting” relates to contributions that are made to an employee stock option plan, or to some other investment plan like a 401(k), an annuity or a retirement pension plan. When an investment or retirement plan is fully vested, the employee enjoys the right to the full amount of money in the account, regardless of whether he or she retires or otherwise leaves the company. The amount of money that has been vested can not be taken back by the employer, but if part of the account is not vested that portion of the money could be forfeited if certain situations occur, such as the employment being terminated.

In the US, there are specific limitations to the ways that employers might limit vesting options. They may stipulate a minimal period of employment with the company in order for the individual to receive full benefits, a practice which is called cliff vesting. They may also opt for a certain percentage of the contributions to be vested each year, such as twenty percent per year over five years. This is called graduated vesting. Vesting plans let employers provide a real reward to those employees who stay with the company for a length of time. It is also possible for companies to vest additional investments, such as stocks or other considerations.

The length of time for a vesting period will usually range between 3 and 5 years for regular employees. However, the vesting period may be shortened for people who serve on the board of a company, or those who serve in capacities that would tend make their time with a company shorter than the norm.

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