Graded vesting is when an employee gradually gains ownership of employer contributions in their work-sponsored retirement plan or even employee stock options. The amount of ownership usually increases over the course of a few years until it reaches 100%.
Graded vesting is most often seen with employer-sponsored retirement plans. If you have one, such as a 401(k), you’ll want to know how your vesting schedule is set up and what happens to your retirement account if you leave a company before you’re fully vested.
Definition and Examples of Graded Vesting
Graded vesting is the gradual ownership of employer contributions to a retirement plan. It is a type of vesting schedule that slowly increases over the course of a few years.
Every employer that offers a retirement plan will have its own vesting schedule, so check with yours to see if it’s graded or not.
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.
|Years of Work||Graded Vesting Schedule|
Generally, employees should be 100% vested no later than six years. Graded vesting schedules may be shorter than six years, but employees typically need to be at least 20% vested within two years. The actual graded vesting schedule will vary based on the company.
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 is often used as an employee retention tactic. It gives you full access to all contributions in the retirement account after a specific number of years, which may incentivize you to stay working at a company until you’re fully vested. If you leave before then, you lose out on what could be seen as free money.
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.
No matter the vesting schedule all employees must be 100% vested by the time they reach their full retirement age under the plan or when the plan is terminated.
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% vested
- Year 2: 0%
- Year 3: 100%
|Graded Vesting||Cliff Vesting|
|100% vested over time, with the amount vested increasing gradually year to year||100% vested immediately after a specific amount of time, as defined by the employer and plan|
|100% vested no later than year six||100% vested no later than year three|
Graded Vesting and Saving for Retirement
While graded vesting is one way companies try to retain employees, it may not be the best system for everyone. For example, if you’re looking to leave a company, you may feel compelled to stick it out for your retirement plan, even if you don’t like your job or employer. And if you do leave before the vesting period is up, you’ll lose out on some of the contributions from your employer.
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.
- Graded vesting is the gradual increase of employee ownership of employer contributions in a work-sponsored retirement plan, like a 401(k).
- There are a few different types of vesting schedules, but graded vesting tends to take the longest for you to become fully vested. Typically, graded vesting schedules are six years.
- If you leave a company before becoming fully vested, you’ll also be leaving some or all of the free money your employer contributed to your retirement account.
John Hancock. "14 Answers You Should Know About 401(k) Eligibility and Vesting." Accessed Oct. 22, 2021.
Internal Revenue Service. "Retirement Topics - Vesting." Accessed Oct. 22, 2021.