The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 20. What Is Vesting?

VESTING REFERS to the ownership of the money in your retirement plan and can mean different things depending on the style of the plan. In a pension plan, if you quit your job or are terminated before becoming entirely vested, you can't collect any of the money set aside in your retirement fund. When you are entirely vested, retirement benefits must be paid to you, even if you leave the company years before retirement. If you return to a former employer after a "break in service," or after working somewhere else, you must be given credit for your prior service.

Many employers see vesting as a way to reward loyal employees for sticking with the company and as a way to keep employees on board. But under traditional defined benefit pensions, vesting by itself does not mean much in the way of benefits. Even an employee who had worked ten years for a company—say from age twenty-two to age thirty-two—might have very little in the way of vested benefits, certainly not enough to turn down a good career opportunity.

A 401(k) plan functions differently from a defined benefit pension plan. The money an employee contributes to a 401(k) plan is vested immediately. Whenever that employee leaves the employer, he has the right to take that money with him. But the money an employer contributes to the account—the company match or profit-sharing dollars—is a different category, controlled by the employer.

An employer may provide immediate vesting on that money, too. But it ...