Graded vesting is a schedule used by employers to gradually grant employees ownership of employer-contributed retirement plan assets or benefits over a specified period. It is commonly associated with employer-sponsored retirement plans, such as 401(k) plans, pension plans, or stock option plans.

In a graded vesting schedule, an employee earns increasing percentages of ownership or entitlement to employer-contributed benefits over time. The vesting schedule is typically structured in a way that encourages employee retention, as employees become more entitled to their benefits the longer they stay with the company.

Here’s a simplified example of how a graded vesting schedule might work:

1. **Year 1:** 20% vested
2. **Year 2:** 40% vested
3. **Year 3:** 60% vested
4. **Year 4:** 80% vested
5. **Year 5:** 100% vested

In this example, an employee who has completed one year of service would be 20% vested, meaning they are entitled to 20% of the employer-contributed benefits. Each additional year of service increases the vesting percentage until the employee becomes fully vested after completing five years of service.

The purpose of graded vesting is to provide an incentive for employees to remain with the company for a certain period, fostering employee loyalty and longevity. If an employee leaves the company before becoming fully vested, they may forfeit a portion of the employer-contributed benefits.

It’s important to note that vesting schedules can vary, and employers have the flexibility to design vesting schedules that align with their goals and industry norms. Additionally, certain types of retirement plans, such as Individual Retirement Accounts (IRAs), typically do not have vesting schedules since contributions are made by the individual rather than the employer.

Employees should carefully review the vesting schedule outlined in their employer-sponsored retirement plan documents to understand how and when they become entitled to the full benefits. Vesting schedules are subject to regulations, and employers must comply with applicable laws, such as those outlined in the Employee Retirement Income Security Act (ERISA) in the United States.