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Vesting is an employee's right of ownership of retirement benefits. Your client's employing institution
determines the vesting schedule for the basic retirement plan, which can be either immediate or delayed.
Vesting schedules apply only to employer contributions and earnings on employee contributions.
Employee contributions (as well as any earnings attributable to employee contributions) are always
immediately vested. Since voluntary TDA plans such as our SRAs are funded entirely by employee
contributions, clients who have SRA funds will always be fully and immediately vested.
Immediate Vesting
After your client joins his/her retirement plan, all contributions and earnings will vest automatically
and at once if it is an immediate vesting plan. The maximum participation requirements for eligibility
for a plan with immediate vesting are two years of service and the attainment of age 21, or, for
educational institutions, one year of service and the attainment of age 26.
Delayed Vesting
Employees in delayed vesting plans don't have ownership rights to the contributions (and any earnings on
those contributions) made by the employer on their behalf until they meet vesting requirements. There
are two objectives here: to reward employees with longer service, and to reduce the cost of providing
benefits to employees who leave after only a few years of service.
There are two types of delayed vesting. One is cliff vesting, in which your client works
several years and then vests fully at a threshold date. In three-year cliff vesting, for example, none
of the client's accumulation would vest during the first two years of participation. But at the end of
the third year, the employee's entire accumulation would be 100 percent vested. Under graded
vesting, in contrast, ownership of retirement benefits accrues in stages -- for example, 20
percent after two years, 40 percent after three years, and so on, until the entire accumulation is
completely vested. For employer matching plans, contributions must vest by the end of the third year.
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