310 Chapter 7 Retirement Plans
schedule may allow for partial vesting that grows with years of service. With cliff vesting,
it is an all-or-nothing proposition. After a certain number of years of service, you become
fully vested in the plan; prior to that point you have no vested benefit and will receive no
benefits from the plan if you depart before that point. A cliff vesting schedule might look
like this one:5-YEAR CLIFF VESTINGYe ars of Service Completed Vesting Percent<5 years 0%
5 years 100%Cliff vesting is simple enough, but its all-or-nothing approach can be a bit severe. If your
company’s pension plan uses this schedule, leaving your job even 1 day before your fifth
year of service is completed would mean that all of your earned benefits from the plan are
forfeited. If you hang on just one single more day, all of your earned benefits are yours
forever.
An alternative approach gradually increases the amount of your earned benefits that
are vested as you accumulate additional years of service. With step vesting, you may be
entitled to a certain percent of your benefits, depending on your years of service when you
leave. A step vesting schedule could look like this one:7-YEAR 20% STEP VESTINGYears of Service Completed Vesting Percent<3 years 0%
3–4 years 20%
4–5 years 40%
5–6 years 60%
6–7 years 80%
7 years 100%Government regulations generally require that the vesting schedule be at least as favorable
to the employee as either 5-year cliff vesting or the 7-year step vesting shown in the sample
schedule above. (The schedule can be more favorable to the employee, but not less so.)
It is also generally the case that any contributions made by the employee himself, and
any earnings on those contributions, are 100% vested at all times. Vesting schedules typi-
cally apply only to benefits funded by and contributions made by the employer.Example 7.1.6 Dave has just been laid off from his job. He was covered by the
company’s defi ned benefi t pension plan, which provides a benefi t of 2% fi nal year’s
salary for each completed year of service, beginning at age 65. Dave earned $43,600
at this job in the last year, and had completed 6 years of service. The pension plan
uses the 7-year 20% vesting schedule shown above. What is Dave’s vested benefi t?According to the benefi t formula, Dave is entitled to 6(2%) 12% of salary as a benefi t.
This works out to be (12%)($43,600) $5,232 per year. According to the vesting sched-
ule, though, he is only vested in 80% of this benefi t. Thus, Dave’s vested benefi t is (80%)
($5,232) $4,185.60 per year, beginning at age 65.Example 7.1.7 Kelly is leaving her job where she has been working for 3½ years. The
company uses 7-year 20% vesting for its defi ned contribution plan. The money Kelly has
contributed to the plan herself has accumulated to $5,722.16; the company contributions
have accumulated a total of $4,810.33. Find her vested balance in this plan.The amount accumulated from the company’s contributions is 20% vested, so Kelly gets to
keep (20%)($4,810.33) $962.07. The accumulation from her own contributions is always
fully vested. So in total, she will keep $5,722.16 $962.07 $6,684.23.