What does "vesting" mean in terms of employer contributions to a retirement plan?

Vesting refers specifically to the process by which an employee earns the right to keep employer contributions made to their retirement plan. When an employer contributes to a retirement plan, such as a 401(k), those contributions may not automatically belong to the employee if they leave the company before a certain period of time. Vesting outlines how much of the employer's contributions the employee can retain based on their length of service.

Typically, vesting schedules can be immediate, graded, or cliff-based, where an employee may gradually earn ownership of employer contributions or may fully own them only after a specific period of employment. Understanding vesting is critical for employees to know their rights and what they can take with them if they leave their job, making it a key component of retirement planning.