Please explain to me "vested"

[lilprincessnbuzz]

Can someone please explain to me what it really means to be "vested" ? I'm job searching and one of the companies says you are fully vested after 3 years. Does 3 years sound normal, to be vested, whatever that means? Thanks!

 

[Lisa loves Pooh]

It means after 3 years--any matching they did to your 401K is 100% yours. If you leave before 3 years. The matching benefits do not go with you (you don't get all of the money if any of it).

My hubby was vested after 6 years---so his 6 years of company matching---which was 100% up to 6% of his salary each year---he gets to keep all of it.

3 years is excellent!

 

[indylaw99]

Three years seems like a long time. Most companies I have dealt with are 6 months or a year.

What is vesting? A pension? A 401K?

 

[Lisa loves Pooh]

Vesting is 401K .

Not to be confused with a probationary period. Separate.

And it does not apply to what you contribute to the 401K.

 

[indylaw99]

Sorry to follow up my own post!

Lisa brings up a good point. It depends what is vesting. For a company to match 100% on up to 6% on a 401K is really nice. It would be worth it to wait longer than that. I've typically seen matching more like 50% on up to 6% or 100% on 3%. So you would expect to vest sooner because the company is not giving you as much "free" money.

It's essentially a way for the company to 1) encourage you to invest in your future and 2) encourage you to stay with the company longer. So it is part for their benefit and part for yours.

In companies where you have pensions, you often have a vesting period as well. I think mine is 5 years. Unless you stay 5 years, you do not get the money that has been set aside for your pension distribution. They tell you during that 5 years what they are setting aside for you, but you forfeit it if you leave before vesting.

 

[stealthnet]

There are also vesting periods for stock options...

 

[lilprincessnbuzz]

Goodness you guys are fast!!!

Here is what is says on their website: (I've deleted the name of the company)

401 (k) Employees can contribute up to 50% of their pre-tax earnings, up to the $12,000 annual limit (IRS requirement). **company** matches a portion of your contribution. Employees are eligible on the first day of the month following 2 months of service and can select from a variety of professionally managed investment funds ranging from conservative to more aggressive investment objectives. You become fully vested after 3 years of employment.


The Retirement Plan -**company** makes a lump sum retirement contribution annually for eligible employees. The contribution is invested in stock, bonds, cash and other investment vehicles with full vesting occurring after 7 years. Contributions vary depending on pay and years of service. Long-term employees can receive up to 5.5% of their annual pay each year. All employees are eligible who have twelve months of service, who work at least 1,000 hours during the plan year and who are employed January 1 and December 31 of the plan year. This program is fully funded by **company** and employees are automatically enrolled!


Do these sound good?? I don't know what is good, what to expect, or how it all works. Sorry to sound so dense, I'm just not good at this stuff. My DH knows all this stuff, but when I try to ask him he makes it way too confusing

I'll be happy just to get a job, but if by chance I have the opportunity to actually chose between job offers it would be nice to know which has better benefits.

Thanks a bunch!!!

 

[The Disney Bunch]

Three years seems like a long time. Most companies I have dealt with are 6 months or a year.

What is vesting? A pension? A 401K?

I think you are thinking of eligibilty to be in a plan- Most pension plans have some sort of an eligiblity period that you have to work for them before entering into the plan. Once you are in the plan, you look at vesting. If you re in a 401(k), the salary deferrals are 100% vested because this is your own money being deferred from your compensation. Employer contributions towards the plan incur vesting. It means each year you work you earn more of the company's money - After one year, you are entitled to,say, 35% of the contriution made on your behalf. The next year, you are entitled to 65% and after 3 years you are entitled to 100%. This means when you terminate employment, you are entitled to take all of the funds deposited in your account on your behalf.

 

[salmoneous]

See if this makes sense:

There are two pots of money that go into a retirement plan - money that comes out of your paycheck, and money that your employer contributes. The money that comes out of your paycheck is always yours. If you quit tomorrow, it's still your money.

For the money that your employer contributes, it isn't that simple. Even though the money is in your account, the money isn't necessarily yours. If you quit after a year, the employer will typically keep all the money; you get none. On the other hand, if you stick around 10 years or more, the money will typically be all yours when you leave.

"Vesting" is when the money your employer has contributed becomes yours. A plan has to tell you when some or all the money is vested, i.e. is yours to keep if you leave the job.

When looking at how valuable a retirement benefit is, you need to look at both how much the employer is contributing, and how long you have to work there before you "own" those contributions (vesting). Since you will eventually be fully vest in any plan, you really only need to worry about the vesting schedule if you think it likely you will leave after only a few years.

Note this particular employer is giving you two retirement benefits. They make all the contributions into one, and will match a portion of what you contribution to the other. They don't tell you exactly how much they are contributing. However, the fact that they have the employer-pay-all plan in addition to the 401(k) plan is a very good sign. More and more companies are going to 401(k)-type plans only. So this is benefit is probably an above average value..

 

[wdw_dine_junkie]

Sounds pretty generous to me. My company doesn't vest until 5 years. Some companies do a partial vest each year. 20% for 1 year, 40% for 2 years, etc..

 

[brentalex]

Goodness you guys are fast!!!

Here is what is says on their website: (I've deleted the name of the company)

401 (k) Employees can contribute up to 50% of their pre-tax earnings, up to the $12,000 annual limit (IRS requirement). **company** matches a portion of your contribution. Employees are eligible on the first day of the month following 2 months of service and can select from a variety of professionally managed investment funds ranging from conservative to more aggressive investment objectives. You become fully vested after 3 years of employment.


The Retirement Plan -**company** makes a lump sum retirement contribution annually for eligible employees. The contribution is invested in stock, bonds, cash and other investment vehicles with full vesting occurring after 7 years. Contributions vary depending on pay and years of service. Long-term employees can receive up to 5.5% of their annual pay each year. All employees are eligible who have twelve months of service, who work at least 1,000 hours during the plan year and who are employed January 1 and December 31 of the plan year. This program is fully funded by **company** and employees are automatically enrolled!


Do these sound good?? I don't know what is good, what to expect, or how it all works. Sorry to sound so dense, I'm just not good at this stuff. My DH knows all this stuff, but when I try to ask him he makes it way too confusing

I'll be happy just to get a job, but if by chance I have the opportunity to actually chose between job offers it would be nice to know which has better benefits.

Thanks a bunch!!!

This does sound good because it seems that the company contributes to your 401k AND gives you a separate pension plan that they totally fund. Very few companies these days have both. Many large profitable companies ( a large computer company , and a large telephone company for example ) are stopping their payments to their pension plans, leaving only the 401k. So if your prospective company still has both that it a good thing.

 

[minnieandme]

That sounds good considering where I work, we don't become fully vested until 10 years. Thankfully for me I have 8 down, 2 more to go!!!

 

[NotEZBNGreen]

This is my first post! I've read the boards alot (valuable info and entertaining).

I wanted to answer this question because I am an "expert". I administer retirement plans for a living.

You should think of vesting as your ownership rights in your retirement plan. If you are 20% vested, you are entitled to 20% of the employer's contributions (and earnings). If you are 100% vested, you are entitled to 100% of the employers contribubutions (and earnings). It doesn't matter why you leave. You'll still get your vested percentage. Also, your employer cannot reduce your vested percentage for any reason.

You will always be 100% vested in any money YOU contribute.

Now on the the specifics you posted:

401(k) - After 3 years of service, you will be 100% vested in the employer match to the 401(k) plan. This could mean you get 100% after three years and nothing after years one and two (called a "cliff" schedule because you get the vesting all at once). It could also be a "graded" vesting schedule. A graded schedule is where you get the vesting in increments (common examples are 20% per year or 33% per year). The material you posted is not specific enough to determine if it's a cliff schedule or a graded schedule. Your (future) employer will give you that info. You can usually get an answer in the interview if you ask.

"Lump sum retirement contribution" - This is a percentage the employer may contribute to your account. You do NOT have put any money in to receive it, but you do have to meet the other requirements you posted (employed on certain days, certain number of hours worked, etc.). It says fully vested after 7 years. This will be a graded schedule. It's actually a popular vesting schedule used by retirement plans. This is how the schedule will work.

Before 3 years - 0%
3 years - 20%
4 years - 40%
5 years - 60%
6 years - 80%
7 years - 100%

The 7 year schedule is also the maximum schedule that can be used (per IRS regs).

Since the maximum amount for "long term employees" is 5.5%, you may not get very much as a new employee. That depends on how the retirement plan is designed (and there are tons of options for retirement plan design).

Is it a good benefit? Maybe, maybe not. It depens on how much they match for the 401(k) and how much they actually put in as a "lump sum contribution" (as well as what kind of investments are available, etc.)

Neither of the plans described are a traditional receive $XX per month pension plan.

 

[DVCLiz]

This is my first post! I've read the boards alot (valuable info and entertaining).

I wanted to answer this question because I am an "expert". I administer retirement plans for a living.

You should think of vesting as your ownership rights in your retirement plan. If you are 20% vested, you are entitled to 20% of the employer's contributions (and earnings). If you are 100% vested, you are entitled to 100% of the employers contribubutions (and earnings). It doesn't matter why you leave. You'll still get your vested percentage. Also, your employer cannot reduce your vested percentage for any reason.

You will always be 100% vested in any money YOU contribute.

Now on the the specifics you posted:

401(k) - After 3 years of service, you will be 100% vested in the employer match to the 401(k) plan. This could mean you get 100% after three years and nothing after years one and two (called a "cliff" schedule because you get the vesting all at once). It could also be a "graded" vesting schedule. A graded schedule is where you get the vesting in increments (common examples are 20% per year or 33% per year). The material you posted is not specific enough to determine if it's a cliff schedule or a graded schedule. Your (future) employer will give you that info. You can usually get an answer in the interview if you ask.

"Lump sum retirement contribution" - This is a percentage the employer may contribute to your account. You do NOT have put any money in to receive it, but you do have to meet the other requirements you posted (employed on certain days, certain number of hours worked, etc.). It says fully vested after 7 years. This will be a graded schedule. It's actually a popular vesting schedule used by retirement plans. This is how the schedule will work.

Before 3 years - 0%
3 years - 20%
4 years - 40%
5 years - 60%
6 years - 80%
7 years - 100%

The 7 year schedule is also the maximum schedule that can be used (per IRS regs).

Since the maximum amount for "long term employees" is 5.5%, you may not get very much as a new employee. That depends on how the retirement plan is designed (and there are tons of options for retirement plan design).

Is it a good benefit? Maybe, maybe not. It depens on how much they match for the 401(k) and how much they actually put in as a "lump sum contribution" (as well as what kind of investments are available, etc.)

Neither of the plans described are a traditional receive $XX per month pension plan.

Welcome to the DIS!!! Boy, where were you when I started the "How Much for Retirement " thread a few weeks ago? We could have used you then!!!! Just kidding - it's a nice group of people here and I'm sure we'll ask you lots of questions as time goes on!!

 

[lila]

401 (k) Employees can contribute up to 50% of their pre-tax earnings, up to the $12,000 annual limit (IRS requirement).

I just wanted to point out this is dated - the 2006 401k contribution cap is $15,000.

 

[disneysteve]

Vesting sometimes stacks the deck against you. When I was an intern and resident, our hospital system didn't have you vested until 5 years of employment. Well, I was only in a 3-year training program so there was no way for me to become vested. Very fortunately, however, the hospital got sold toward the end of my 3-year stint and one of the terms of sale was that all existing employees got fully vested so I ended up walking away with a nice little chunk of money that I totally wasn't expecting.

 

[The Disney Bunch]

That sounds good considering where I work, we don't become fully vested until 10 years. Thankfully for me I have 8 down, 2 more to go!!!

This is a different type of plan than what the OP is referring to. It sounds like a defined benefit rather than a 401(k) or profit sharing plan. The rules changed a few years ago for 401(k) & profit sharing plans so that 5 years is as long as it gets.