Vesting
Vesting is the process by which an employee earns the right to keep employer-contributed retirement benefits over time. Before you are fully vested, leaving your job means forfeiting unvested employer contributions. Your own contributions always vest immediately.
Employer 401(k) matches and pension benefits are subject to vesting schedules. There are two common types: cliff vesting (you get 0% until a set date, then 100% — often 3 years) and graded vesting (you earn a growing percentage each year, typically reaching 100% at 6 years).
By law (ERISA), most private-sector retirement plans must fully vest employees within 6 years. Government plans and union plans may have different rules.
Vesting is a major financial consideration when evaluating job changes. Leaving two months before a cliff-vesting date could forfeit years of employer matching. Many employees time their departures strategically to capture unvested benefits.
Related terms
- 401(k)
- A 401(k) is a US employer-sponsored retirement savings account. Contributions are pre-tax (traditional) or post-tax (Roth), grow tax-deferred or tax-free, and benefit from compound growth over decades.
- Pension (Defined Benefit Plan)
- A pension is a defined benefit (DB) retirement plan that pays a guaranteed monthly income for life, based on your years of service and salary history. The employer bears the investment risk, unlike a 401(k) where the employee does.
- Traditional IRA
- A traditional IRA (Individual Retirement Account) is a tax-deferred retirement account. Contributions may be tax-deductible (depending on income and whether you have a workplace plan), and withdrawals in retirement are taxed as ordinary income.