Certified Plan Sponsor Professional (CPSP) Practice Exam

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What does the term 'cliff vesting' refer to in a retirement plan?

Gradual earning of benefits
Immediate full benefits after a certain period
Partial benefits based on service years
None of the above

The correct answer is: Immediate full benefits after a certain period

Cliff vesting refers to a specific method by which employees earn full rights to their retirement benefits after completing a designated period of service, without any incremental benefits prior to that period. In this model, benefits are not accrued gradually; instead, employees become fully vested all at once once they have satisfied the required service time. This approach can encourage employee retention, as individuals may choose to stay with an employer until they reach the vesting threshold, knowing that their benefits will be secured in full once they do so. The terminology emphasizes the sudden transition from no vested benefits to complete vested benefits, resembling a "cliff" that employees reach at the end of their service requirement. This is why the notion of immediate full benefits after a certain period correctly characterizes cliff vesting.