01:38 PM EDT on Tuesday, October 4, 2005

By Neil Downing / The Providence Journal

How long must you work before you become "vested" in a pension plan at work? In other words, how much time must you put in before you earn the nonforfeitable right to a pension benefit — even if you leave your job? That, in effect, is the question a man from Barrington asked MoneyLine:

Q: Are there any exceptions/exemptions to the five-year minimum federal law requirement on employees becoming vested into a company's pension plan? Are there any mitigating circumstances that would allow an employee to have vested rights with less than five years of service?

— A.M., Barrington

A: Yes, said Jeanne Medeiros, a lawyer and legal coordinator for the New England Pension Assistance Project, a nonprofit group that helps people solve problems with pensions, 401(k)s and other retirement-savings plans.

It all depends on how your plan works. But there are some general rules.

You mentioned one of them in your question to MoneyLine. It's known as five-year "cliff" vesting. If your pension plan has adopted that rule, you'll generally earn the right to receive a benefit from the plan (you'll become vested) after five years of service, Medeiros said. If you leave before then, you won't receive a benefit.

But there's another option, known as three-to-seven-year graded vesting, she said. If your pension plan has adopted that rule, you'll earn the right to receive a benefit from the plan in stages:

• 20 percent vested after three years

• 40 percent after four years

• 60 percent after five years

• 80 percent after six years

• 100 percent after seven years

Those are the rules for traditional pension plans, technically known as defined benefit plans. With these, the employee typically doesn't contribute and doesn't direct the way the plan's money is invested. Instead, the employer typically makes contributions, assumes the risk for the plan's investments and promises to pay a certain benefit, based on the plan's rules.

Another set of rules applies to retirement savings plans, technically known as defined contribution plans, such as 401(k)s. These plans generally work this way: the employee contributes (the employer may, too), and directs the way the money is to be invested. The employee assumes the risk for the plan account's investments, and, at a certain point, receives whatever is in the account, based on the plan's rules.

Defined contribution plans typically have either three-year cliff vesting, or two-to-six-year graded vesting, Medeiros said in a telephone interview from her organization's headquarters in Boston. (You're always 100-percent vested on your contributions in such plans; the vesting requirement applies to your employer's contributions.)

It's vital to know how your plan works, and how and when you earn the right to a benefit, said Robert E. Veasey Jr., former chairman of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others.

"It's probably one of the most important cogs in the wheel of investment success — to know where you stand with those dollars," Veasey said in an interview at Sowa Financial Group of East Providence, where he is a financial adviser.

A worker may want to vest quickly — to earn the right to a benefit as soon as possible — in case the worker wants to move to another job, he said. An employer who makes a significant investment in worker training may want to set a higher vesting hurdle to discourage rapid turnover in the work force, he said.

Also important is understanding the details of your plan, said Veasey, a Certified Financial Planner practitioner. For instance, even if you're partially or fully vested, your plan may not allow you to actually receive a benefit until you reach a certain age, he said. Also, some traditional pension plans allow for full, 100-percent vesting in the event of a worker's death or disability, Veasey said.

Following are a few more points to keep in mind:

• The vesting rules listed above, for both traditional pensions and for retirement-savings plans, are minimum requirements; your plan's rules may be more generous, allowing you to vest more quickly, Medeiros said.

• Check the "summary plan description" your employer gave you for details on your plan's rules. That document will also spell out other important details, such as what counts as a plan year. (A plan typically credits a worker with one year of service if the worker has logged 1,000 hours during the year, Medeiros said.)

• The rules mentioned above generally apply to private-sector plans. A government-sponsored or church-sponsored plan may have a higher vesting hurdle, Medeiros said.

TODAY'S TIP: If you have a problem or question about a pension or retirement-savings plan, contact the New England Pension Assistance Project, which is based in Boston and serves all New England states. Call toll-free at 1-888-425-6067, or see its Web site: www.pensionaction.org.

The U.S. Department of Labor's Employee Benefits Security Administration has a number of booklets that explain pension and retirement-savings plans and how they work, including vesting rules. To order a publication, or to reach the agency's nearest regional office for help with problems relating to private-sector retirement and health plans, call toll-free at 1-866-444-3272. More information is available at the agency's Web site: www.dol.gov.

MoneyLine correspondent Neil Downing is a staff writer for The Providence Journal in Rhode Island and author of "The New IRAs and How to Make Them Work for You." Do you have questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail moneyline@projo.com.

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