What is a vesting schedule?

A vesting schedule determines when employer contributions to retirement plans become fully owned by the employee, typically over a period of years of service. For professional service firms, vesting schedules help retain employees by creating a financial incentive to remain with the company.

Key characteristics

• Determines ownership of contributions

• Based on years of service

• Applies to employer contributions

• Employee contributions are always vested

• Various schedule types allowed

• Forfeited amounts stay in the plan

Why it matters for professional service firms

Vesting schedules create retention incentives by tying ownership of employer contributions to continued employment. Employees who leave before fully vested forfeit unvested amounts. Professional service firms can use vesting to encourage longer tenure.

Real-world example

Kevin's firm used a year-graded vesting: 25% vested after year 1, 50% after year 2, 75% after year 3, 100% after year 4. Employee leaving after 2 years: $12,000 in employer contributions retained; $6,000 (50% vested) forfeited. The vesting schedule encouraged employees to stay through the full vesting period.