Final answer:
Vesting is the process by which retirement benefits become nonforfeitable. It applies to defined contribution plans like 401(k)s and 403(b)s, where both employer and employee contribute funds that are then invested. These funds are tax-deferred, portable, and help guard against inflation.
Step-by-step explanation:
The process by which a retirement benefit becomes nonforfeitable is called vesting. In defined contribution plans such as 401(k)s and 403(b)s, an employer contributes a fixed sum to the employee's retirement account typically every pay period, and the employee may contribute as well. Once vested, the funds in these accounts are owned by the employee, even if they leave the company. A key advantage of these plans is their tax-deferred nature and portability, meaning employees can take the plan with them if they change jobs. These plans allow individuals to invest in a wide range of investment vehicles, providing the opportunity for real rates of return that can help offset the impact of inflation on retirement savings.