401(k) Vesting Explained & How it Works

January 8, 20235 min read
401(k) Vesting Explained & How it Works
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Key Takeaways

  • 401(k) vesting is the process of transferring ownership of an employer-sponsored 401(k) retirement account to the employee.
  • Employers often use vesting to retain employees, who often must wait a number of years before they’re fully vested.
  • Once an employee is fully vested, the account remains theirs through any employer change, layoff, or termination of contract.

Those interested in determining the best investment strategies for retirement planning have some options to consider. One of the most common is the 401(k) plan. Several benefits are associated with such a plan, including matching contributions from employers. However, it is important to note that all the employer-contributed money in such a plan does not “belong” to an employee until they become “vested”.

This article will explore 401(k) vesting and how it works.

What is 401(k) Vesting?

With 401(k) plans, each participant contributes a percentage of every paycheck to their tax-advantaged investment account. Many employers will “match” that contribution in full or in part. Within that, 401(k) vesting is the process of shifting ownership of an employer-sponsored 401(k) retirement account to the employee.

While an employee immediately owns any funds, they contribute to their 401(k) account (the 2023 maximum is $22,500), employers that match employee contributions will often delay ownership transfer for a set number of years.

Once that time requirement is met, the employee will fully own the account, even if they change employers, are laid off or terminated. The amount the employee owns is their vested balance. Having said that, participants must be at least 59.5 years old to withdraw funds from most traditional 401(k) plans without incurring a 10% penalty.

What are 401(k) Vesting Schedules?

Companies that do not offer “immediate” 401(k) vesting, in which their 401(k) contributions go to their employees right away, frequently adhere to one of these two vesting schedules:

  • Graded vesting. Employees become invested in increments over a certain number of years with a company. For example, the participant might own 20% after two years, 40% after three years, and 100% after five years. According to the Internal Revenue Service, the maximum time it can take for an employee to become fully vested is six years.
  • Cliff vesting. Employer contributions shift to the employee following an established number of employment years. For example, a plan “cliff” after three years means the employee would own 0% of their accounts at the end of years one and two, and 100 percent at the end of year three. The maximum time it can take to become fully vested is three years.

Pros and Cons of 401(k) Vesting

Key considerations might include:


  • Employees are incentivized to contribute because they know they will ultimately become fully vested.
  • Employees feel more secure because they know they will not lose their retirement savings if they leave their job.


  • Employees might continue with a job for which they do not care, solely to eventually become fully vested.
  • Likely early withdrawal penalty and taxes.

Other Types of Vesting

Employers often use vesting to attract and retain employees. In other words, people are less likely to leave a company if they know that, simply by waiting, they will receive a certain amount. Vesting is also a way for employers to encourage their employees to save for retirement.

In addition to 401(k) vesting, there is stock option vesting, which allows employees to purchase company stock in the future at a pre-established price, the stock’s current value notwithstanding.

With pension vesting, vesting schedules determine when employees can receive their full pension benefits.

How to Know if 401(k) Investing is for You

Employees should familiarize themselves with their employer’s vesting guidelines and schedule to help them plan for their financial future. Generally, though, it is almost always a good move to contribute to a 401(k) plan to take advantage of company contributions.

What is the Best Retirement Plan?

With a wide variety of options such as traditional and Roth 401(k) accounts, pension plans, Individual Retirement Accounts and taxable investment accounts, determining which retirement plan is the best can be difficult for employees.

The answer really depends on one’s goals and situation.

However, regardless of the retirement plan one chooses, adding assets that have a low correlation to volatile public markets can be a viable means of diversification.

Alternative investments can be a good way to accomplish this.

Portfolio Diversification and Alternative Investments

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened several carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


Depending on one’s situation, it is always a clever idea to take advantage of an employer’s 401(k) vesting plan as part of retirement planning. Among the key benefits are employer matching contributions, which are the equivalent of free retirement money. With that said, it is important to be mindful of vesting schedules, to ensure the employer contributions will transfer, should an employee retire, get laid off, or leave the company.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including the possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.