For example, if an employer's contribution is based on a fixed percentage of the employee's contribution, the initial period of service might be two years. After two years, the employee would be 20% vested, after three years, 40%, with the employee eventually becoming fully vested after six years. Graded vesting differs from cliff vesting where employees become immediately 100% vested following an initial period of service.
Employers must follow certain federal laws that determine the longest allowable vesting periods; however, they are able to choose shorter periods. In addition, if a plan is terminated, all participants become fully vested immediately.
Investment dictionary. Academic. 2012.
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