HR Mavericks

Eddy’s HR Mavericks Encyclopedia

Vesting
When it comes to vesting in retirement plans, words don’t mean what they used to mean. Terms like “cliff and employer match” do not mean an actual cliff or immediate money from your employer. Read on to learn about the types of vesting, how vesting can be helpful in your organization and how to implement it in your organization.

What Is Vesting?

A great way to understand vesting to think of it like the levels of ownership of a retirement plan. A common misconception about vesting is thinking employees actually own everything in the account, but that’s not true. Vesting can mean anything from 1-100% vested depending on how an organization has defined the retirement plan for all employees. The most important takeaway is that whatever the amount or percentage vested, employers cannot take it back for any reason. For example, if an employee chooses to leave before they are 100% vested in their retirement account, the money they contributed will come back to them fully, but the money their employer contributed will only be given based on the vested amount outlined in their retirement plan.

Types of Vesting

There are three types of vesting schedules you should evaluate when applying an employer match to retirement contributions. Let’s review them below.

Immediate Vesting

This type of vesting leaves nothing to the imagination. It is an immediate, 100% vesting option for employees. This does not necessarily mean you cannot abide by your 90-day probationary period for employer benefits, but if this is the route best fit for your organization, once your employees are eligible to contribute, employer contributions are owned by the employee immediately. If the employee leaves after 6 months of employment, all the funds in that account belong to them, not the employer.

Graded Vesting

Less clear by the title, graded vesting means the employee receives ownership of employer contributions over an established graded schedule. For example, in their first year, they are 20% vested; by their second year, they’ve moved to 40%; their third year puts them at 60%; their fourth year is 80%; and finally, at their fifth year of employment, they’re 100% vested in the organization. This is a common type of vesting that shows employees you believe in them at year one with lower risk than the immediate vesting option.

Cliff Vesting

When it comes to cliff vesting, imagine a set year and suddenly the funds are 100% the employee’s. With this type of vesting, employers will establish a schedule similar to graded vesting, except in this schedule, they provide the 100% vested amount all at once. An example of a cliff vesting schedule would be in years 1-4, an employee is 0% vested, and by year 5, they are 100% vested. This schedule poses the least risk to the organization to provide employer contributions to employees, as employees only receive them after a certain number of years.

Why Is Vesting Helpful?

Now that we have a clear picture of vesting, let’s dive into why vesting is helpful for an organization.
  • Retention. First and foremost, providing employees with a potential vesting opportunity through an employer-provided benefits plan keeps them around longer. If you offer a cliff vesting plan where they have to work a certain number of years before they receive any of the employer match, you’re encouraging them to stay longer than they may have originally. This is a great way to utilize vesting to your advantage in retaining employees.
  • Incentive. Job markets are competitive, and while salary drives most individuals, looking to the future and preparing for retirement without a vesting retirement plan hinders their success. With a retirement program and vesting plan, you’re incentivizing current employees and new candidates. Believing in them now is great, but supporting their future speaks volumes.
  • Improved performance. When employees feel valued, their performance improves. While morale is still an important focus, implementing a vesting option to your retirement plan can show employees you’re a stable organization and that you value them as individuals. You’re setting each employee up for improved performance with one item: vesting.

How to Implement Vesting

Now that there is a clearer picture of vesting, let’s look at how to implement a retirement plan with vesting for your organization.

Step 1: Reach Out to Your Plan Provider

If your organization currently has a retirement plan in place, reach out to your plan provider to say you would like to start providing an employer match to open the dialogue. There may be additional documentation you have to go over, such as your current retirement plan information and organizational earnings and wages. The plan provider can ensure the employer matching contributions are in the best interest of the organization overall.

Step 2: Establish the Vesting Schedule

Establish what vesting schedule will work best for your organization. Perhaps you are a smaller organization with employees who have been around for years, and it would make sense to utilize the immediate vesting option to show employees you trust them and appreciate their dedication over the years. If you’re a larger organization with a high amount of turnover, cliff vesting would be more up your alley. If you’re trying to retain talent and ensure you’re staying competitive, a form of graded vesting would be to your benefit. Whichever route you choose, ensure you select an option considering both your business best interest and the interest of your employees.

Step 3: Communicate Clearly With Employees

If your organization has never had an employer match in your retirement plan or your employees are new to the vesting idea, be sure to communicate clearly how exciting this is. Let them know you have started something new or have changed the previous options, and get them excited about it. Perhaps you could offer financial advisors who may assist them as they learn how to allocate their money and anticipate the employer contributions that will come their way.
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Shalie Reich

Shalie Reich

Shalie has over 4 years of experience working in a variety of HR positions and organizations including: working as an HR department "of one", working with a start-up based in Europe, to working in a fully established robust USA based HR department. Shalie has experience in multiple states and countries with all aspects of the HR spectrum. She has a passion to share her knowledge and experience to benefit the HR profession!
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