What Is a Vested Interest?
A vested interest is a personal stake or involvement in a project, investment, or outcome. In finance, a vested interest is the lawful right of an individual or entity to gain access to tangible or intangible property such as money, stocks, bonds, mutual funds, and other securities at some point in the future. There is usually a vesting period or time span before the claimant may gain access to the asset or property.
- A vested interest refers to an individual's own stake in an investment or project, especially where a financial gain or loss is possible.
- In financial parlance, a vested interest often refers to the ability to rightfully claim assets that have been contributed or set aside for later use.
- This is common for retirement plans like a 401(k), where employers may match employee contributions - but where the employee can claim those matched funds only after some minimum vesting period.
Understanding Vested Interest
Vested interests exist in numerous entities throughout the financial landscape including pension plans and 401(k) plans.
With an employee pension plan, contributions are under the stipulation that the participant would be entitled to the funds at some point in the future. In this case, the participant or investor has as a vested right to the earnings. The vesting period varies by pension plan before the participant gains access to funds. There may also be restrictions on withdrawal amounts to a specific percent per vested year. For example, after waiting the five year vesting period, Peter was allowed to withdraw 20% from his retirement fund each consecutive year.
An employee who contributes money toward a 401(k) plan may also have a vested interest in the company match if the employer offers one. Typically companies that match their employee's 401(k) contributions have their distinct vesting schedules. These schedules dictate the amount of the company match an employee is entitled to based on their years of service. For example, a company may designate a 20% entitlement of matched funds for employees after one year of service. If Peter contributes to a 401(k) with a company match, he would be fully vested or entitled to the entire company match after five years of service. But if he leaves the company in three years, he would be allowed to take only 60% of the company match with him.
Some companies have vesting cycles that don't break the match down into portions. In other words, an employee is fully vested after working at the company for a set amount of time. Say Peter works for a firm in which eligible employees become fully vested in the company match after working for five years. If Peter leaves this firm after three years, he takes home none of the company match funds. Therefore, it's crucial for 401(k) participants to pay attention to their companies' vesting schedules.
Vested Interest vs. Vested in Interest
Vested interest should not be confused with vested in interest, which applies to entities such as trusts. The beneficiary of a trust is vested in interest if they do not have to meet any condition for their interest to take effect. The recipient has a "present right to future enjoyment," such as a right to property when another beneficiary's interest ends. In this case, that beneficiary has access to the property when the primary beneficiary becomes deceased.