What is 'Fully Vested'
Fully vested is a person's right to the full amount of some type of benefit, most commonly employee benefits such as stock options, profit sharing or retirement benefits. Benefits that must be fully vested benefits often accrue to employees each year, but they only become the employee's property according to a vesting schedule. Vesting may occur on a gradual schedule, such as 25% per year, or on a "cliff" schedule where 100% of benefits vest at a set time, such as four years after the award date.
BREAKING DOWN 'Fully Vested'To be fully vested, an employee must meet a threshold as set by the employer. This most often requires employment longevity, with benefits released based on the amount of time the employee has been with the business. While the funds contributed by the employee to an investment vehicle, such as a 401(k), remain property of the employee even if he leaves the employment position, company-contributed funds may not become the employee’s property until a certain amount of time has lapsed.
An employee is considered fully vested when he has met any agreed-upon requirements set forth by the company to become the owner of 100% of the associated benefit. For example, when an employee becomes fully vested, he becomes the official owner of all of the funds within his 401(k) regardless if they were submitted by the employee or added by the company.
Instituting a Vesting Schedule
To institute a vesting schedule, the conditions set forth must be agreed upon by the employee. Often, this requirement can be considered a condition of receiving the benefit. If an employee chooses not to agree to the investing schedule, he may surrender his rights to participate in employer-sponsored retirement benefits until he chooses to agree. In those cases, employees may have the option of investing for retirement independently, such as with the use of an individual retirement account (IRA).
Business Benefits of Vesting Schedules
With vesting schedules, companies seek to retain talent by providing lucrative benefits contingent upon the employees' continued employment at the firm throughout the vesting period. An employee who leaves employment often loses all benefits not vested at the time of his departure. This type of incentive can be done on such a scale that an employee stands to lose tens of thousands of dollars by switching employers. This strategy can backfire when it promotes the retention of disgruntled employees who may hurt morale and simply do the minimum required until it is possible to collect previously unvested benefits.