What Is 401k Vesting?

401k vesting deals with the process of making the funds in an employee's 401k account available to them in stages. The purpose of 401k vesting is to try to retain employees and keep them from taking all of their money immediately and going to another company.

How It Works

Most 401k plans have a vesting schedule that they use in order to make funds available to employees. With a 401k, the employer will match employee contributions up to a certain amount. This essentially is free money that the employees get to use for their retirement. With vesting, the employee will get access to a certain amount of that money after each year of service. For example, many businesses use a 20 percent per year vesting schedule. After the first year of service, if the employee leaves, they could take as much as 20 percent of the employer matches. After five years, they will be fully vested which means that they can take all of the employer contributions.

Employer Discretion

The vesting schedule on a 401k is at the employer's discretion. Some of them will utilize a longer vesting schedule than others. This gives the employer some flexibility when deciding how to deal with their benefits program.