“What does vested balance mean?”, is a popular question from investors who are serious about their financial journey. Vested balance is an important term for anyone contributing to a fund, such as a 401 (k) account or a pension scheme.
If you have a vested balance somewhere, it means you own it. A good example is money you leave in a company after you stop working there. That money could be part of your 401 (k) contributions, company stocks, or pension scheme funds. The terms of a savings scheme will determine your vested balance in a fund.
What Does Vested Balance Mean?
The contributions you make when working for any employer are primarily for retirement. They can also come in handy when you lose your job. These savings often act as a source of funds before you find another place of employment. It is your vested balance in an organization.
Your employer cannot take your vested balance when you leave your job, even if you are fired. Whether an employer’s contribution to a fund you are investing in is vested depends on the type of contribution. Your contributions to some funds are 100 percent vested, while you only own part of the money in others.
A vesting schedule determines the time it takes for you to own the money in a fund. For example, savings known as safe harbor matching contributions are 100 percent vested. You automatically own the funds an employer contributes to matching yours in a savings scheme under such terms. However, in some cases, your employer’s contributions to a saving plan become vested after a specific time.
What Is a Vesting Schedule?
Over three-quarters of employers match their employee contributions to retirement plans. A vesting schedule determines how long it takes for you to own all the funds in such a plan.
You should check the vesting schedule of a fund immediately when you join a company. This information is usually in your 401 (k) or your annual benefits statement summary description.
Your HR representative can also answer this question and explain your vesting schedule to you. Understanding your vesting schedule will help you plan your finances and prepare for your retirement as you work in a company.
Some examples of terms you will find in a vesting schedule are:
- Immediate vesting: It means employees own 100 percent of all the contributions made by an employer to a fund on their behalf
- Cliff vesting: This term means your employer’s contribution to a fund on your behalf is fully vested after three years of working there.
- Graded vesting: This type of vesting gives employees gradual ownership of money contributed to a fund by their employers. They will eventually own 100 percent of these funds by the time they retire.
Importance of a Vesting Schedule for Employers and Employees
Hiring employees under graded or cliff vesting terms allows employers to retain valuable staff over a long period. It prevents employees from quitting a job because they stand to lose some funds.
Employees should always consider the meaning of vested balance terms in their contract before leaving a job. Otherwise, leaving before the specified terms when you are ineligible to get all the money in a fund is counterproductive.
Whenever a potential employer offers you an attractive salary, always calculate the unvested funds you might lose before accepting a job. The amount could be much more than what you will get from your new employer.
Once you retire or leave your place of employment, you should get your vested balance in a fund. If you cannot access it immediately, it could be because the terms of your vesting schedule do not allow it. But if you can access your funds, consider reinvesting the money in a profitable fund.
There are ways to withdraw money from a fund while working for an employer if your vesting schedule terms prevent it. For instance, you can ask for a loan from your employer or take hardship withdrawals. You may then use the money to make investments that add to your savings.
Whatever the case, always check the terms of your vesting schedule when investing.