A vest is a sleeveless garment worn on the upper body. But “vest” is often used in the context of finance. If you’re asking what does vested mean while you’re considering your employer-provided benefits, chances are you’re talking about taking ownership of your retirement plan, stock options, or restricted stock.

What is vesting? When you start a new job that has a retirement plan, you’ll probably be given a date when those benefits will be vested. Once you reach that milestone, even if your employment doesn’t work out, the funds in that retirement account will be there, waiting for you to claim them on the day you reach official retirement age. It’s important to know your vesting schedule to ensure you’re taken care of in retirement.

What Does Vesting Mean?

The official Merriam-Webster vested definition is “to grant or endow with a particular authority, right, or property.” In employment terms, the vested meaning simply applies to the years you’ll need to work for an employer before any retirement savings or stock options will be yours at retirement. If your employment terminates before you’re fully vested, part or all of it will revert to the plan administrator.

A vesting schedule should be disclosed during the interview process, giving you the chance to turn it down if you choose. Some employers don’t have a vesting period, which means any stock options or retirement contributions your company makes will be yours to keep. If two companies are offering similar salaries and benefits, check into the vesting schedule to see if one is better than the other.

Basics of a Vesting Schedule

Often vesting schedules refer to 401(k) vesting, as well as other types of retirement accounts, but they can also apply to restricted stock or stock options. Basically, if your employer is making an investment in you, that employer is going to want you to stick around. If, for instance, your employer offers you shares in the company or matches your 401(k) contributions and you leave after a year or two, the employer will lose that money without vesting requirements. But most importantly, these perks are an incentive to keep you from leaving.

But it’s not always easy to define vested. Employers have flexibility when it comes to choosing a vesting schedule for its workers. There are two major types of vesting schedules:

• Graded Vesting – With graded vesting, you’ll receive a certain percentage of ownership at each increment. In many cases, this is a five-year schedule that has you 20 percent vested at each anniversary.
• Cliff Vesting – This type of vesting is an all or nothing proposition. You will be given a fixed date at which you’ll be 100 percent vested. If you don’t make it to that milestone, you’ll receive nothing.

Vesting Schedules for Retirement Accounts

You’ll most often see a vesting schedule with your retirement plan. If your employer contributes money toward your retirement savings, such as in a 401(k) match, the employer may put a schedule on it to make it more likely you’ll stick around.

With a retirement account, vesting refers to when the funds become yours. If you’re fully vested at five years on a cliff vesting schedule, and you leave after three years, none of the money your employer contributed will be yours. If you leave after the five-year mark, though, the money will be there for you when you retire, no matter what happens to the employer.

It’s important to note that the money you put in the retirement account is not subject to vesting. If you contribute funds to your retirement savings account, your portion of the funds will remain even if you don’t make it to the 100-percent vested milestone.

Vesting Schedules for Stock Options and Restricted Stock

If you’re given stock options or restricted stock as part of your employment, a vesting schedule will likely apply. Vested stock is similar to vested retirement savings in that you’ll need to meet a certain milestone for ownership of the stock to apply. Vested stock has the same types. With some you’re vested immediately, others award a certain percentage each year, and others give you nothing unless you work until you’re fully vested.

Unlike vested retirement savings, vested shares or options can be accessed before you retire. If you join the right company, you could boost your annual salary well beyond any raise you would ever get. But you’ll need to carefully review the vesting schedule to see at what point you’ll have ownership of your shares.

Special Considerations

Vesting doesn’t just apply to employment. You’ll also find that it shows up in other areas of life. One is estate planning. If two people share ownership in a property, the way the deed is written is very important. There are two options:

• Joint tenants with rights of survivorship – In this scenario, the deed vests both owners equally in the property. If one dies, the surviving owner is automatically awarded full ownership. If there are multiple tenants, the shares are split equally among the surviving parties.
• Tenants in common – Things get a little more complicated in this type of arrangement. It could be that both parties are roommates rather than spouses or life partners. The deed in this case vests each tenant as a separate interested party. When one dies, each surviving tenant gets a share. The property will go into probate and the deceased tenant’s share will be granted to the person as dictated by the will or, in the absence of a will, dictated by local laws.

Final Thoughts

What does it mean to be vested? It depends on the asset. With retirement savings and stock options, it means you’ve been with the company long enough to earn ownership over the assets your employer has promised. With real estate, it refers to the way your survivorship is set up. If you’re looking at a document that mentions vesting, we recommend consulting a financial planner to ensure it’s the best option for you.

Frequently Asked Questions

What does vesting mean in the context of employer-provided assets?

Vesting refers to the process by which an employee earns the right to keep employer-provided assets over time. In the context of retirement plans, vesting gives employees ownership of contributions made by the employer to the employee's retirement account after certain conditions, typically related to length of service, are met.

Are all employer contributions subject to vesting schedules?

Yes, many employer contributions, such as those made to a 401(k) plan, pension plan, or stock options, can be subject to vesting schedules. These schedules determine when the employee gains full ownership of these assets.

What are the common types of vesting schedules?

There are generally two main types of vesting schedules:

• Cliff Vesting: The employee becomes 100% vested after a specific period of service, with no incremental vesting before that time.
• Graded Vesting: The vesting percentage increases gradually over time until the employee becomes fully vested.

How long does it take to become fully vested?

The timeframe to become fully vested can vary by employer and the type of plan. For retirement plans like a 401(k), federal law sets maximum limits on vesting schedules, typically 3 years for cliff vesting or 6 years for graded vesting.

What happens to non-vested assets if I leave my job?

If you leave your job before you are fully vested, non-vested assets remain with the employer. You only retain ownership of the vested portion of your assets.

Can vesting schedules apply to stock options and equity awards?

Yes, vesting schedules are common for stock options and other equity awards given by employers. These schedules often require that employees remain with the company for a certain period before gaining the right to exercise stock options or claim equity awards.

Are vesting rules the same for all types of retirement plans?

No, vesting rules can vary depending on the type of retirement plan. For example, contributions to a defined benefit pension plan may have different vesting schedules compared to a defined contribution plan like a 401(k).

Can an employer change the vesting schedule?

Employers can change vesting schedules for future contributions but cannot retroactively alter the vesting schedule of amounts already contributed to an employee's account.

Does vesting affect how much I should contribute to my retirement plan?

Vesting schedules primarily affect employer contributions. Your personal contributions to a retirement plan, like a 401(k), are always 100% vested immediately. Vesting schedules should not deter you from making personal contributions to your retirement savings.