How does vesting work in a retirement plan?

The correct answer is that vesting determines how much of the employer's contributions an employee can take if they leave. Vesting refers to the process by which an employee earns the right to keep the employer's contributions to their retirement plan, usually based on their length of service with the company.

In many retirement plans, employees may have immediate access to the contributions they make themselves, but employer contributions often come with a vesting schedule. This schedule outlines the timeframe over which the employee accrues rights to the employer's contributions. For instance, if an employee leaves before they are fully vested, they may forfeit a portion or all of the employer contributions, depending on the plan's rules. This incentivizes employees to stay with the company longer to benefit fully from the employer's contributions.

The other options do not accurately describe vesting. For example, while some plans may offer benefits that vest before retirement age, that concept does not capture the essence of what vesting specifically means in relation to employer contributions. Additionally, vesting is not concerned with calculating tax-free growth or with restricting overall contributions; instead, it focuses solely on the rights to employer-contributed funds based on the employee's tenure.