Retirement plan vesting periods are common in both the public and private sector. There are vesting rules for pension plans, defined contribution plans, guaranteed return plans, hybrid plans, and anything in between.
In the private sector, vesting periods are determined by the employer, or plan sponsor. In the public sector, vesting periods are typically set by state governments and can vary widely.
For public employees, understanding the vesting terms of a public retirement plan can be a helpful way to determine whether or not a retirement plan meets their needs.
What is Vesting?
In short, vesting is the process of qualifying for the right to claim guaranteed benefits offered by an employer.
The vesting period is the minimum number of years a state or local employee needs to work in a state in order to be entitled to receive a pension benefit or the money their employer has contributed to their individual retirement account.
Why Do Government Employers Use Vesting Periods?
There are many reasons why states might offer longer or shorter vesting periods, though it usually boils down to two main factors.
To Retain Talent
The primary reason that employers give for using vesting periods is to help them with retaining staff talent. The basic logic is that people will stick around longer if they know they haven’t vested in their retirement benefits.
While this logic may work for a small number of individuals who are within a few months of reaching their vesting period, in practice, the value of the retirement benefits available after just a few years is rarely sufficient to be a reason, on its own, for an employee to stay in civil service.
To Save Money
The political reality is that most state governments use retirement plan vesting periods as a way to save money. By setting vesting periods at five, seven, or sometimes even 10 years, state governments are able to reduce the amount of future pensions they have to distribute (or the employer payments to defined contribution plans they will have to release).
How Public Pension Vesting Periods Changed After the Financial Crisis
One of the ways that states responded to the Great Recession and financial crisis of 2007-09 was to look for ways to save money on retirement benefits. A common way that states did this was to increase the number of years that public employees have to work to qualify for a pension.
For example, in Illinois, teachers hired before January 1, 2011, have to work five years in order to vest in their pension benefits. For state workers, they need to complete eight years of service. But both teachers and state workers hired from 2011 onward have to work 10 years to be eligible for their retirement benefits.
Or in New York, public employees hired before January 2010 have a five-year vesting period to qualify for pension benefits, while those hired after that point were, until recently, required to work 10 years to vest. Notably, in 2022, the New York state legislature reduced this vesting period back to five years after a sustained campaign that demonstrated how problematic this policy was from the perspective of providing adequate retirement benefits to public workers.
Average Pension Plan Vesting Period Over Time
The chart below shows the average vesting period for pension plan tiers while they were open to new hires, broken out by different categories of employees.
Vesting periods for teachers and public school employees average 6.6 years, while public safety officers have 8.8-year vesting periods on average. Pension plans for general civilian state and local employees average 6.5-year vesting periods.
Across all employee types, the average vesting period is 7.5 years. As noted above, there was a noticeable increase in the average vesting period in the years after the Financial Crisis (shaded area).
Public Pension Vesting Periods by State
Vesting periods also vary from state to state.
The table below shows average public pension vesting periods by state, including data for traditional final average salary pensions, defined benefit guaranteed return plans, and hybrid plans that include a pension portion.
Defined Contribution Vesting Periods
The approach to vesting for defined contribution plans can sometimes look different than for pension benefits. In this context, employees are not vesting in the right to draw a pension check. Instead, they are vesting in the right to claim employer contributions made to individual accounts on their behalf.
A typical vesting period for defined contribution plans might look like this:
- After one year of service, a member has vested in 50% of the employer contributions made to their defined contribution account
- After two years of service, 75% vested
- After three years of service, 100% vested
This would be considered a three-year “graded” vesting period. Different states use a range of graded vesting period approaches. South Carolina, for example, immediately vests employees in their defined contribution benefits.
The table below lists the statewide defined contribution plans for public workers and the vesting approach that they use.
