Certified Plan Sponsor Professional (CPSP) Practice Exam

What is a key feature of a 'graded vesting' schedule?

1. Participants become vested at a fixed point in time

2. Vesting occurs gradually over a predetermined time period

3. All employees are 100% vested immediately

4. Vesting is based solely on company performance

The correct answer is: Vesting occurs gradually over a predetermined time period

A key feature of a 'graded vesting' schedule is that vesting occurs gradually over a predetermined time period. This means that employees earn ownership of their retirement benefits incrementally, rather than all at once. For example, an employee might become fully vested in their employer contributions after a set number of years, with partial vesting occurring each year. This approach encourages employee retention, as participants are incentivized to stay with the company longer to receive the full benefits of their retirement plan. In contrast, immediate vesting would mean that employees are fully vested as soon as they start working, which does not provide the same incentive for long-term employment. A fixed point in time for vesting would suggest a cliff vesting schedule, where employees become fully vested all at once after a certain period. Additionally, vesting based solely on company performance does not align with the concept of graded vesting, as it focuses on company metrics rather than a time-based schedule for employee tenure.