Personal Finance

Grading attribution

What is graded attribution?

Tiered vesting is the process by which employees gain ownership of employer contributions to employee retirement plan accounts, traditional pension benefits, or stock options over time. Tiered vesting differs from cliff vesting, where the employee vests fully after the initial period of service; immediate vesting, where the employee contributes as soon as they start working.

key takeaways

  • Hierarchical vesting is exactly what it sounds like, and is awarded gradually over a period of time rather than all at once.
  • Some argue that graded vesting is better than cliff investing (all at once) because it removes the temptation to exit in tough times.
  • Certain contributions to retirement accounts vest immediately, such as SEPs and simple IRAs.

Learn about hierarchical attribution

Hierarchical affiliation encourages employee loyalty, as affiliation works over consecutive years of employment. Many employers offer matching contributions to employees’ tax-deferred retirement accounts as a way to attract employees and gain corporate tax benefits. In some cases, these matches are 100%, and under certain limits, maybe 7% of salary. In this case, an employee who earns $75,000 a year and puts 7% of their income into a 401(k) account will save $10,500 a year for retirement while only having $5,250 in their own pockets.

Employer contributions have greatly increased retirement savings over the years. But while these contributions are real money put in every year, the principal and potential earnings will only be on paper until employees are vested.

Employers must comply with certain federal laws that determine the maximum allowable vesting period, which is generally six years; however, they are free to choose a shorter period. Additionally, if a program is terminated, all participants are immediately vested in full. Contributions to SEPs and simple IRAs are always fully vested immediately. An employee’s personal contributions to any retirement plan are always fully vested in the employee, even if they leave their jobs.

It’s important for employees to understand their company vesting schedule, because resigning before the full vesting period can mean leaving free money on the table, whether in the form of tax-deferred retirement savings, pension plans, or stock options.

Any principal and potential earnings will only appear on paper until the employee is vested.

Typical graded vesting schedule is six years

In a typical graded vesting plan, an employee vests 20% of their accrued benefits after an initial period of service, with an additional 20% vesting in each subsequent year until full vesting occurs. The initial period of service will generally vary.

For example, if the employer’s contributions are based on a fixed percentage of the employee’s contributions, the initial service period may be two years. After two years, the employee will be vested 20%, after three years 40%, and the employee will eventually be fully vested after six years.

Some companies believe that gradual vesting of employees helps retain employees for a longer period of time than cliff investing. The idea behind this is that if employees gradually “reward” their coats, they are more likely to feel taken care of by the company.

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