Changing Jobs? Don't Forget Your 401(k) (Game) Plan

Changing jobs? There’s more to it than adjusting to a new work environment, a (hopefully) salary increase, and optimistically, a more pleasurable work atmosphere. If you are already participating in a 401(k) plan, don’t forget about the details of that plan when reupping at the next jobsite.

What are the Odds?

Odds are, you may be confronted with a different but significant set of 401(k) rules and procedures at your new digs. Thanks to newly released research by “owner-investor champion” Vanguard, job switching can be harmful to an average earner’s retirement health if he or she fails to ascertain the particulars of the new company’s 401(k) plan…assuming it has one…and if it does, finding out if new hires are auto-enrolled at a lower savings rate than the one they enjoyed at their former workplace.

Vanguard’s informative research involving some 54,000+ folks who shifted from one Vanguard-administered plan to another during an eight-year period ending in 2022 revealed some disturbing data:

1. On a positive note, 64% of job switchers received a welcomed pay boost at their new company. But on a less positive note only 44% of them increased or maintained their former savings rate. Was an inattentive employee the culprit, or was it the separate set of rules used to administer the new company’s 401(k) program…or both? In any event, such potential oversight could prove to be quite a savings momentum interruption along the path to a secure retirement.

2. In addition, more than 50% of those who were auto-enrolled at the new workplace remained – knowingly or not – at a lower (default) savings rate during the first year of their new job.

3. And for those job switchers who joined companies that don’t auto-enroll employees, almost 25% failed to set up a 401(k) plan. The failure of employers to auto-enroll new workers, or for new employees to not join a 401(k) plan, could spell disaster on the road to retirement.

4. Even more troubling, those employees who leave a trail of small 401(k) balances behind, more often treat those balances as income…a small windfall to be spent, whereas much larger 401(k) balances are more commonly viewed as valuable assets to be retained. In short, frequent job-changers are more likely to end up with a series of small 401(k) balances, which they spend.

Don't Interrupt!

For whatever reason, the long-term significance of such (rude) interruptions or reduced rates of savings can have significant impacts on an individual’s degree of financial security in retirement.

Let's refer to Vanguard’s example:

A 25-year-old employee who earns $60,000 and who is auto-enrolled at the most popular current contribution default rate of 3% of pay, and whose saving rate is automatically raised by an annual percentage point of 1% to a maximum of 10%, will by age 65 have nearly $800,000 in his/her 401(k) retirement account (In this example, Vanguard assumed a 50% employer match on the first 6% of the employee’s contribution).

Before we continue with the example, it's important to call out that, according to the Bureau of Labor Statistics, the average American will have nearly 13 different jobs before retirement, potentially exposing themselves to frequent savings-momentum interruptions.  

Now, assume that the employee changes jobs eight times during his/her 40-year career, and that his/her savings rate reverts to the automatic default 3% upon each change of employment. In this example, Vanguard makes the same 50% employer-matching contribution assumptions and the same 1% annual increase in the saving rate. Following this scenario of repeated savings disruptions, the employee would accumulate a whopping $300,000 less in his/her 401(k) account upon retirement.

That's a chunk of change!

Be SECURE

The Federal Government’s Setting Every Community Up For Retirement Enhancement Act (Secure 2.0 Act) of 2022 mandates that all new retirement plans automatically enroll every employee and automatically escalate their savings rate over time. Of course, employees have the right to opt out at any time, but a surprisingly small number do.  

In order to alleviate or eliminate savings rate declines when workers change jobs, Vanguard continually reminds employers about the potential benefits of auto-enrolling workers at 6% of pay rather than 3%. And the company spotlights another potential momentum-salvaging solution – that lawmakers/regulators allow employers to auto-enroll new workers at the rate they had in their previous 401(k) plans to avoid the loss of savings momentum.

Regardless of regulation or company policy, my advice to new employees has always been: Start saving early in your career. To optimize the power of compounding, young folks should develop the habit of saving with that first paycheck using 401(k)s, IRAs or both at an increasing rate (assuming pay increases) with the objective of finally achieving a savings rate of 10-15%  on an annual basis.

In Sum

The Vanguard study indicates that employees who change jobs often leave their 401(k) behind, fail to sign up for a new 401(k) plan, or wind up routing a lessor portion of their salary into an existing  plan…often without realizing it.

With the thought in mind that 401(k) plans were supposed to help provide replacements for those vanishing old-school pension plans (only about 11% of private-sector workers are covered by a pension plan in today’s workplace), it’s hard to imagine employees failing to consider retirement savings when switching jobs. But the Vanguard research strongly suggests that many do…and that workers who stay put or seldom change jobs tend to maintain the most momentum in their retirement savings.