What does "vesting" mean in retirement accounts?

Vesting in retirement accounts refers to the process by which an employee earns the right to keep employer contributions made to their retirement plan. This typically involves a specific time frame during which the employee must remain with the organization before they fully own those contributions. For instance, if an employer matches contributions to a 401(k) plan, the employee might need to work for a certain number of years to retain those matching funds if they leave before reaching the vesting schedule.

The concept of vesting is crucial because it encourages employee retention; workers are incentivized to stay with the company long enough to gain full ownership of the employer's contributions. Thus, understanding vesting is essential for both employees planning for retirement and employers looking to create effective retirement benefit programs.