If you have a defined contribution plan, like a 401(k), both you and your employer can contribute to your retirement account. However, the access you have to the funds in that retirement account varies by the type of vesting schedule your company institutes. You’ll always have 100% access to the money that you contributed while working there. The vesting schedule will only apply to the funds contributed by your employer. With graded vesting, you might need to work at the company for a set number of years to reach 100% ownership of your employer’s contributions. The table below shows what that might look like. Let’s say you’ve worked at your company for three years, but you recently accepted another job and are leaving. If your company’s vesting schedule was a six-year schedule (like in the table above), you’d only be entitled to 40% of your employer’s contributions in your retirement account. You could roll over your retirement funds from your work-sponsored account to another account (like your new 401(k) or an IRA), but you won’t see the full amount of funds move over. Instead, you’d see all of your contributions, 40% of what your employer contributed, and anything you earned on that money.
How Graded Vesting Works
In graded vesting, leaving a company before you’re fully vested means you won’t be able to cash in on all your employer’s contributions to your plan. So if you have an employer-matched 401(k) plan, you could lose out if you leave the company before being fully vested. Vesting schedules vary based on the company you work for. Some companies institute graded vesting while others have cliff or even immediate schedules. These other types of vesting schedules may give you immediate access to employer contributions once you’ve opened your account.
Graded Vesting vs. Cliff Vesting
Cliff and graded vesting are two popular vesting schedules, and companies can choose which one they implement. Some companies may even allow for immediate vesting which means you could start owning all funds in the retirement account as soon as you and your employer begin contributing. Cliff vesting is a different type of vesting schedule that gives employees full ownership of all the funds in their retirement account all at once, whether immediately when they start with the company or after a couple of years. Here’s a sample three-year cliff vesting schedule:
Year 1: 0% vestedYear 2: 0%Year 3: 100%
However, regardless of your company’s vesting schedule, taking advantage of an employer-sponsored retirement account is a perk that may help you save more for retirement faster, especially if your company offers matching contributions. And even if you don’t plan to stay at a company until you’re vested, contributing money to an account like a 401(k) gives you the chance to save pre-tax money. This reduces your taxable income in your paychecks. Remember, you’re always 100% vested in your own contributions with retirement accounts, no matter how long you’ve worked at a company. So any savings for retirement, no matter how small, will help you in the long run.
