Vesting refers to the process of a financial benefit becoming yours over time. The most common example is a 401(k) match. (There are other types of compensation that might vest, such as options, but we’re focusing on the vesting of 401(k) matching contributions here). Some companies match a portion of your 401(k) contributions, but if there is a “vesting schedule”, those matching funds aren’t yours immediately. If you leave the company before the matching contributions are fully vested, not all of the matching funds go with you.
Companies have different options for vesting, but most use one of three common types.
Immediate vesting means matching contributions are yours immediately.
There’s no delay and if you leave the company everything in your 401(k) goes with you, including 100% of any matching contributions.
Cliff vesting means matching contributions are 0% vested until the cliff date in the future.
After that date, you are fully vested and 100% of the matching contributions belong to you. The cliff is often 1-5 years out from your start date. In other words, before the cliff date none of the matching contributions are yours. After the date, 100% of them are.
Graded vesting means that a portion of the matching contributions vest every year until you become fully vested.
For example, a four year graded vesting plan would vest 25% of matching contributions the first year, 50% the second year, 75% the third year, and 100% after four years.
Once you are fully vested, matching funds from subsequent years are generally fully vested immediately. In other words, the vesting schedule doesn’t start over again for each year’s matching contributions, it starts when you start the job and once you’re fully vested, you’re fully vested for past and future matching funds.
Whatever the vesting plan, it’s important to remember that when it comes to your 401(k) the vesting period only applies to the matching contributions from your employer. Your contributions, and any investment growth, is yours right away and stays yours no matter what.