February 7th, 2013
When it comes to company retirement accounts we need to understand the word vesting schedule. What is this and why should you care?
When it comes to company retirement accounts we need to understand the word vesting schedule. What is this and why should you care?
Vesting in the context implies receiving benefit or receiving full benefit. Schedule implies a time based system for receiving a portion of full benefits. For example, in terms of a 401k retirement plan an employer may only match funds at 5% for the a probationary time period then increase to 8% after the probationary period of 6months or 1 year. In terms of an annuity style retirement plan It may take 7-10 years to be vested and receive full benefits but there may be periods of time that fractional benefits are released. Other employers may offer immediate vesting. Some may immediately vest but if you leave the company within a certain time period of 1 year they may ask for the benefit to be refunded or they may hold the benefit in escrow.
Another very good answer, Aaron. The vesting period varies from organization to organization. In a nutshell, the matching money you receive from your employer is promised to you if you stay at the company for an allotted amount of time.
Here is one example: Your vesting period is 5 years and you receive 20% of the matching money per year. This means if you stay 1 year you will receive 20% of the matching money that the employer has provided (this is usually company stock for public companies or contributions to your selected mutual fund investments if you work for the federal, state, or non-profit organizations). If you stay 2 years, the number goes up to 40%, and so on until you hit the 5 year mark where you would receive 100% of the matching money. Understand these rules carefully before considering a job change. There can be real money at stake!