Concluding the series on least understood financial terms, Mitchell Hockenbury explains in plain English the terms vesting and vested. You may see these terms referenced your 401(k) accounts and after watching the video will clearly understand.

Mitchell C Hockenbury is a fee-only financial planner with offices in Kansas City, MO and Omaha, NE serving clients locally and across the country. He meets face-to-face with individuals, families, and small business owners in Omaha and Kansas City. He aligns himself to his clients by taking the fiduciary oath and is never paid a commission of any kind. 1440 Financial Partners provides comprehensive financial planning, investment advice, retirement planning, budget assistance, and determining the optimal time to take Social Security benefits. Mitch has a passion for taking complex financial terms and explaining them in plain English so you can organize, grow and protect your assets.

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If you are a participant in a 401(k) retirement plan, you may have come across the terms “vesting” and “vested” when reviewing your plan details. But what do these terms actually mean, and how do they affect your retirement savings?

Vesting refers to the ownership of the contributions and earnings made to your 401(k) account. When you become “vested,” it means that you have full ownership of these funds and can take them with you when you leave the company, regardless of whether you retire or change employers.

There are two main types of vesting schedules: cliff vesting and graded vesting.

Cliff vesting means that you become fully vested after a certain period of time, commonly three to five years. This means that if you leave the company before reaching this milestone, you may forfeit all or a portion of the employer contributions to your account.

On the other hand, graded vesting gradually increases your ownership of the employer contributions over time. For example, a common graded vesting schedule is 20% vested after the second year of employment, 40% vested after the third year, and so on until you reach 100% vested after six years. This allows you to retain a portion of the employer contributions if you leave the company before reaching full vesting.

It’s important to note that vesting schedules may vary depending on the specific terms of your 401(k) plan and your employer’s policies. Be sure to review your plan’s documentation to understand your vesting schedule and how it applies to your retirement savings.

So, why does vesting matter? Vesting schedules are designed to incentivize employees to stay with the company for a certain period of time. By offering employer contributions that become fully vested over time, companies encourage long-term employment and loyalty among their workforce.

If you leave your job before becoming fully vested, you may forfeit a portion of the employer contributions to your 401(k) account. This can have a significant impact on your retirement savings, so it’s important to consider your vesting schedule when making career decisions.

For example, if you are considering a job change, it’s worth evaluating how your current and potential future employer’s vesting schedules may affect your retirement savings. Additionally, if you are planning to retire or take a break from the workforce, understanding your vesting schedule can help you make informed decisions about when to access your 401(k) funds.

In conclusion, vesting and vested refer to the ownership of employer contributions to your 401(k) account. Understanding your vesting schedule is crucial for making informed decisions about your retirement savings and career choices. Be sure to review your plan’s documentation and consult with a financial advisor if you have any questions about vesting and its implications for your 401(k).