Graded vesting schedule

Understanding a graded vesting schedule is essential for effectively planning retirement. A graded vesting schedule, also known as graduated vesting, allows employees to gradually earn ownership of their employer's contributions over time. 

By spreading out the vesting period, employers encourage employee retention, as they would forfeit unvested employer contributions if they leave early. By familiarizing yourself with how it works, you can better manage your savings and make informed decisions about retirement benefits.

How a graded vesting schedule works

Vesting schedules play a key role in qualified retirement plans. They outline how much of your employer's contributions you can keep as you work longer, typically based on your years of service. 

Different types of vesting schedules

There are three common vesting options for 401(k) plans. Full immediate vesting, required for safe harbor contributions, means employees are 100% vested right away. Under a cliff vesting schedule, employees are not vested until after a set number of years, up to a maximum of three, when they become fully vested. A graded vesting schedule allows employees to gradually gain ownership of employer contributions over six years, with full vesting required by the end of that period.

How a graded vesting schedule works

Your own contributions (deferrals) are fully vested from the start, meaning they belong to you right away. However, employer contributions, such as matching or profit-sharing (non-elective), may be subject to their own vesting schedules. One of the most common schedules is graded vesting. This means that over time, as you continue working for your employer, you gradually earn ownership of these contributions. 

For example, you might be 20% vested after one year of vesting service, then earn 20% each additional year of vesting service until you are fully vested (100%) after five years. Alternatively, a different type of vesting schedule might start with 0% vested after one year, increase to 20% after two years, and reach 100% after six years (see the graph below). Keep in mind that by law, a vesting schedule cannot take more than six years to reach full vesting.

If you leave your job—whether due to termination, layoff, or retirement—before you are fully vested, you can only keep the portion of your employer's contributions that you’ve earned (in most cases). For example, if you are 40% vested, you keep 40% the current balance of your employer sources, and the remaining 60% goes into a forfeiture account. Employers may use this forfeiture account to help offset future employer contributions to the retirement plan, reduce fees, or reallocate to eligible participants. 

Certain cases require a plan to grant full ownership of employer contributions (or 100% vesting). This occurs when an employee reaches the plan’s normal retirement age, if the plan is terminated, or if the participant is affected by a partial plan termination (involving 20% or more turnover in the eligible workforce). 

Graded vesting schedules are designed to reward long-term employment by recognizing loyalty and commitment. As you stay with your employer, you gradually earn full ownership of your retirement savings, which helps build a secure financial future. Understanding these vesting schedule requirements  is key to making informed decisions about your career and retirement planning, ensuring you maximize your savings by knowing how and when you'll fully own employer-contributed funds.

The bottom line

Learning about graded vesting will help you navigate your financial planning with confidence and make the most of your savings. We also encourage you to explore more resources and strategies on saving for retirement. By expanding your knowledge, you’ll be well-prepared to plan your financial future and optimize your retirement savings.