Advanced Diploma of Financial Planning (ADFP) Practice Test

What is the process of graduated vesting?

1. An employer's plan to fully vest an employee immediately

2. A system that allows employees to become fully vested after a set date

3. A method where employees gain partial ownership over time

4. An approach requiring employees to choose their vesting option

The correct answer is: A method where employees gain partial ownership over time

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.