The great thing about a 401(k) plan is that it allows your employer to make contributions to your retirement savings. But those contributions likely follow some rules, called vesting.
When you are fully vested, you are the owner of any contributions your employer makes to your retirement account. Of course, you always own your own contributions, but the employer portion is usually subject to a time schedule.
There are two types of vesting schemes, and it's important to know how your 401K vesting works.
One is a cliff schedule. You keep all the employer contributions once you pass a certain length of employment at the company. The longest period a company can use for cliff vesting is three years, but your employer can choose a shorter time schedule. If you leave the job before three years, you lose all the employer contributions. If you stay longer, you get them all.
The second vesting scheme is a graded schedule. With this plan design, a percentage of your employer's matching contributions become yours over time. The longest time period an employer can elect is six years and after that period you can keep all the employer's contributions. During that graded vesting period, you become the owner of a percentage of your employer's contributions. If you leave the job before six years elapses, you would lose a part of the contributions. If you stay six years, you get them all and all the contributions in the future.
If an employer would shut down the retirement plan, you become 100 percent vested for all past employer contributions. If an employer lays off more than 20 percent of employees participating in the retirement plan, all affected employees become fully vested.
