Advanced Diploma of Financial Planning (ADFP) Practice Test

What does the term 'vested' indicate in the context of retirement plans?

1. Full ownership of personal contributions

2. Eligibility for retirement age benefits

3. Unconditional right to employer contributions

4. Partial ownership after five years of employment

The correct answer is: Unconditional right to employer contributions

The term 'vested' in the context of retirement plans signifies an individual's unconditional right to employer contributions made to the retirement account, even if they leave the company before reaching retirement age. Vested benefits assure employees that the contributions made by the employer on their behalf will be available to them when they are eligible for retirement benefits. This concept is pivotal because it reflects the degree of control and ownership an employee has over the benefits accrued from employer contributions. An employee can become fully vested after a certain period, which indicates that they can take those contributions with them if they decide to leave the job. This is distinct from personal contributions, which an employee always retains ownership of from the moment they are made. Moreover, while retirement benefits are influenced by age and tenure, and while some plans may have partial vesting schedules over a period of time, the critical aspect of 'vested' specifically denotes the unconditional right to those employer contributions.