What does 'Graded Vesting' indicate for an employee's retirement plan?

Graded vesting indicates that an employee's ownership of employer contributions to their retirement plan increases gradually over a specified period. Under this vesting schedule, employees gain a certain percentage of their employer's contributions—usually in annual increments—until they reach full ownership. For example, an employee might become 20% vested after two years, 40% after three years, and so on, eventually reaching 100% vesting after a set number of years.

This method of vesting serves to encourage employee retention, as employees become more invested in their retirement plan the longer they remain with the company. It contrasts with immediate vesting, where employees would retain all contributions right away, and cliff vesting, where all contributions vest at once after a specific period.