A retirement plan participant who is vested has completed the years of service specified by the plan to earn a nonforfeitable right to accrued benefits (under a defined-benefit plan) or account balances including employer matches (under a defined-contribution plan). Under “cliff vesting,” 100 percent of accrued benefits become vested with the completion of the specified service period, but none beforehand. The maximum cliff vesting period under federal law is five years for defined-benefit plans and three years for defined-contribution plans. Employee contributions, however, vest immediately. Because average job tenure is less than five years, many plan participants will forfeit all the benefits funded by their employers.
Maximum vesting periods
The maximum vesting period for employers’ matching contributions to 401(k) plans should be no more than one year. The maximum vesting period for both defined-benefit and all other defined-contribution plans should be reduced to five years or less.