What does it mean to be vested?

Vesting… you’ve heard the term, but do you know what it means?

No, not that kind of vest

This term typically applies to employer-sponsored retirement plans (such as 401(k)s, 403(b)s, etc.). While all of the money you personally contribute to these accounts is yours to invest, keep, and take with you if you were to ever leave your job, your employer’s contribution on your behalf may not be fully “yours”.

Employers will outline a “vesting schedule” for these types of plans which essentially clarifies what percentage of their contributions you can take with you if you were to leave.

For example, an employer may state that you can become fully vested after 5 years of employment at the company, meaning you may “vest” at a rate of 20% per year for five years.

What does this really mean?

Translation: if you were to leave your employer after 5 years, you’ll get every dime that they contributed and invested on your behalf. If, however, you leave before that period, you’ll only get a portion of those contributions (depending on how long you were employed).

So, to use the example laid out above, if your employer were to allow you to vest at a rate of 20% per year, that means you’d only be entitled to 60% of their contribution if you were to leave after 3 years. This means that if they contributed $10,000 per year towards your retirement on your behalf, you’d only be able to take 60% of that amount after three years time if you were to leave (which amounts to $18,000). So, while you wouldn’t be eligible for the full $30,000 that they had contributed over that time period (in this hypothetical example), you’d still have $18,000 that you’d have access to.

Wondering why employers do this?

Two reasons:

  1. To keep you around
  2. To avoid contributing a lot of money if there’s a lot of employee turnover

Wondering how much you should still contribute?

If your employer is willing to match a percentage of your contributions, it is generally wise to at least contribute enough to your account to get their match. After all, the employer’s contributions is essentially free money! If possible, we recommend contributing at least 10% into your employer sponsored retirement plan.

Curious about what your employer offers? Ask your HR rep or look through your company’s benefits policy to make sure you understand what is and isn’t available to you.

Categories : Financial Planning

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