What is vesting?
Vesting means becoming eligible to receive the full or partial financial benefit if you retire or leave the plan. Some of the financial benefits that companies offer—other than basic wages and compensation—aren't paid out immediately and, instead, come with vesting periods. For example:
- If you're a member in a group registered retirement savings plan (RRSP) and your employer offers you matching contributions, you may not have immediate access to the employer portion. Your plan might state, for example, that the employer match vests after one year. This means that if you want to take money out of your plan, you can't take the match until you've been an employee for at least a year.
- If you're in a group defined benefit plan, your benefit may vest after a stated period of time, such as three years of employment. This means that you can't access that money until you've been employed for that amount of time (and pending any other plan withdrawal rules).
- Some companies offer restricted stock units as part of a bonus package, and these also come with a vesting period, usually three to five years, as an incentive to stay with the company.
What are typical vesting periods?
Employers can decide to make certain financial benefits available right away or over time, and the most common types of vesting are immediate, graded, and cliff.
- Immediate vesting—You have access to the benefit as soon as it's in your account.
- Graded vesting—You have gradual access to the benefit over time; for example, in a defined benefit pension plan, you might get access to 50% of the accumulated financial benefit after three year and full access to it over five years.
- Cliff vesting—You must wait until you can receive the full benefit with no incremental benefit in the meantime. A five-year cliff in a pension plan would mean that you aren't eligible to receive the benefit until you've been employed for five years.
When you leave your job, you'll receive the amount of the financial benefit according to the vesting schedule:
- If your plan has immediate vesting, you'll receive the full amount that's been placed in your account.
- If your plan has graded vesting, you'll receive the portion that lines up with the length of your employment. If 50% vests in two years and the full benefit vests in four years, you'll receive nothing if you leave in the first two years, you'll receive 50% of the accrued benefit if you leave between years two and four, and you'll receive the full benefit the day after you've been employed for four years.
- If your plan has cliff vesting, and the cliff is five years, you'll receive nothing if you leave before you hit your five-year anniversary but, after that, you'll receive the entire accrued benefit.
Check your vesting rules before you retire or resign
Whether you're considering retiring or leaving the company for another job, make sure you know what the different vesting schedules are in your workplace plans and other financial benefits, such as RRSPs, pension plans, stock options, and restricted share units. If you don't time your departure thoughtfully, you could end up leaving some money on the table.
If you're a member of a Manulife group plan, you can check in on your savings by signing in to your account here.
The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.