A vested accrued benefit is an entitlement to a lump sum of money or a monthly income stream. The term vesting describes the process by which ownership of a sum of money or asset is gradually transferred to another individual. Pension plans are often subject to vesting schedules, and this means your account balance and your accrued benefits are not necessarily one and the same.
You can deposit a portion of your own salary into an employer-sponsored plan such as a 401(k), 403(b) or simple IRA. These plans are known as defined benefit plans because your contributions, rather than your eventual benefits, are pre-determined. Although you can make these deposits on a pre-tax basis, the money in question already belongs to you since it's drawn from your paycheck. Therefore, employee contributions to retirement accounts are fully vested from the day of deposit. Additionally, earnings on your own contributions are fully vested, which means you can liquidate the account or roll the money into a new plan if you leave your job. However, withdrawals are subject to income tax, as well as a 10 percent tax penalty if you have yet to reach the age of 59 1/2.
Many companies make matching contributions to 401(k)s and other defined contribution plans. Your employer's contributions to the account immediately appear on your retirement plan statements. However, the funds technically belong to your employer until the vesting process reaches its conclusion. In many instances, pension plans use the cliff vesting process, under which all of your employer's contributions become vested three years after you start working for your employer. You stand to lose all of your employer's contributions if you leave your job before the three-year mark.
Aside from cliff vesting, employers in the United States are also permitted to use a graduated vesting schedule for defined contribution plans. Under this vesting method, your employer's contributions become vested at a rate of 20 percent per year. After five years of service the funds in your account are entirely vested. Therefore, the entire process takes longer than the cliff vesting schedule, but you do at least keep some of your employer's contributions if you complete at least one year of service.
Traditional pensions are defined benefit plans because you are guaranteed certain retirement benefits based on your salary level and length of employment. Defined benefit plans are often subject to either cliff or graduated vesting schedules. With defined plans, the cliff vesting lasts for five years, meaning that none of your employer's contributions become vested until you complete five years of service. The graduated schedule for these plans lasts for seven years. Twenty percent of the money becomes vested when you have completed three years of service, and the remaining money becomes vested at a rate of 20 percent per year.
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