What Is Vesting?

What Is Vesting?

Let me explain vesting to you directly: it's the process where you, as an employee, gain full ownership rights to work-related benefits like stock options, shares, or retirement assets. You have to stick with the company for a specific number of years to make this happen, and once vested, those rights can't be taken away.

Employers use vesting to hold onto their best people. When you're vested in things like employer-matched 401(k) contributions or stock options, you own them outright, no strings attached.

Key Takeaways

Being vested means you have non-forfeitable rights to certain assets. Your own contributions to a retirement plan vest immediately, but employer contributions might not. A typical vesting schedule runs three to five years.

How Vesting Works

You might contribute a portion of your paycheck to a 401(k), and your employer could match some or all of it. Your contributions are yours right away—they vest immediately.

But employer matches often don't vest right away. The company sets a schedule for when you gain full ownership of their part. It usually takes a few years, so you need to stay employed to claim them.

With stock bonuses, vesting is a key retention tool. Say you get 100 restricted stock units as a bonus. To keep you around for five years, they might vest 25 units in year two, 25 in year three, 25 in year four, and 25 in year five.

If you leave after three years, only 50 units vest—you own those, but you forfeit the rest.

Types of Vesting

There are two main types: cliff vesting, where you get 100% ownership all at once after a set period, and graded vesting, where you gain a percentage each year.

For example, traditional pensions might use a five-year cliff or a three-to-seven-year graded schedule. Even if you're fully vested, you can't just withdraw without penalties—you still follow the plan's rules, like waiting until age 59½.

Where Is Vesting Used Besides Retirement Plans?

Vesting shows up in wills and bequests too, often with a waiting period after the person's death to finalize the inheritance.

What Does 3-Year Vesting Mean?

It means after three years, you're fully vested in the assets, typically the employer's matching contributions, and you own them completely.

What Is a Common Vesting Period?

Employers often set it at three to five years. Another option is graded vesting over six years: 0% after year one, then 20%, 40%, 60%, 80%, and 100% in years two through six.

Why Would Employers Offer Stock Options on a Vested Schedule?

Startups do this to build loyalty. They grant stock or options that can't be sold until vested, keeping employees focused on the company's success.

The Bottom Line

Vesting is what you go through to unlock ownership of benefits. Employers require a few years of service for this, and once vested in matching funds, those assets are yours without forfeiture.