Advanced Diploma of Financial Planning (ADFP) 2025 – 400 Free Practice Questions to Pass the Exam

Graduated vesting refers to a method where employees obtain partial ownership of benefits or contributions over time. This implies that an employee's rights to their benefits increase incrementally with each year of service. For example, an employee might be entitled to 20% of their benefits after the first year, 40% after the second year, and so forth, until they reach 100% ownership. This approach encourages employee retention, as individuals have a clear incentive to remain with the employer to gain full vesting of their benefits, such as contributions to retirement plans.

The other options do not accurately describe graduated vesting. Immediate vesting means an employee gains full rights instantly, which contrasts with the gradual accumulation process inherent in graduated vesting. A set date for full vesting suggests a cliff vesting model, where employees become fully vested after a specific time frame rather than incrementally. Lastly, allowing employees to choose their vesting option does not align with the systematic nature of graduated vesting, as it is usually predetermined by the employer’s pension or retirement plan. Thus, the correct understanding of graduated vesting hinges on its gradual and incremental approach to employee benefit ownership.