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Don’t Make This Costly 401(k) Mistake When Switching Jobs
By Pete Grieve MONEY RESEARCH COLLECTIVE
The typical job switcher could lose out on $300,000 in savings — “enough to fund an estimated six additional years of spending in retirement,” Vanguard says.
When Americans switch jobs, they often see a boost in earnings — but if they’re not careful, a common 401(k) mistake can be a major setback for their retirement savings.
A 401(k) allows you to allocate a percentage of your paycheck to a tax-advantaged investment account. These employer-sponsored plans are a smart tool for most workers because contributions reduce your taxable income, meaning you don’t pay taxes until you make withdrawals when you’re older. Also, many employers match contributions up to a certain amount, multiplying the savings effect.
Job switchers, though, apparently have a tendency to set a lower contribution rate when they start their new roles — and that can be a costly misstep. According to new research from Vanguard, the typical job switcher’s retirement saving rate goes down 0.7 percentage points when changing companies.
Some people who set a lower 401(k) rate still end up contributing more because their pay bump is significant. In dollar terms, workers who job-switch typically contribute more to their 401(k)s in their new role if their pay bump is at least 10%. But that’s not true percentage-wise.
“What seemed counterintuitive was that those who experienced a pay increase of more than 20% — and hence a potentially greater capacity to save — still exhibited a slowdown in their saving rate,” the Vanguard report said.
Broadly speaking, over half of job switchers, 55%, lower their saving rate, while 44% increase or maintain it. And while the report acknowledges that changing jobs can involve expenses like moving costs, the Vanguard researchers also blame plans’ default contribution rates, which kick in when an employee forgets or elects not to set a 401(k) rate. They report that 3% is the most common and suggest that needs to be higher.
Even a small difference in your saving rate can have a large impact on your saving.
“For a worker earning $60,000 at the start of their career who switches jobs eight times across employers (for a total of nine jobs), the estimated loss in potential retirement savings could be $300,000 — enough to fund an estimated six additional years of spending in retirement,” the report said.
Those figures are based on hypotheticals in which a person works from age 25 to 65 with a starting salary of $60,000. The math assumes a 3% default and employer match.
In the job-switching scenario, the worker’s contribution rate resets to 3% with each job change. Over a course of decades, that leads to a large gap compared to a scenario in which they stayed put and benefitted from automatic increases in their contribution rate.
To be clear: The point isn’t that it’s a bad idea to change jobs (that’s a personal question). But job switchers should aim to at least maintain their saving rate when they make the move.
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Pete Grieve is a New York-based reporter who covers personal finance news. At Money, Pete covers trending stories that affect Americans’ wallets on topics including car buying, insurance, housing, credit cards, retirement and taxes. He studied political science and photography at the University of Chicago, where he was editor-in-chief of The Chicago Maroon. Pete began his career as a professional journalist in 2019. Prior to joining Money, he was a health reporter for Spectrum News in Ohio, where he wrote digital stories and appeared on TV to provide coverage to a statewide audience. He has also written for the San Francisco Chronicle, the Chicago Sun-Times and CNN Politics. Pete received extensive journalism training through Report for America, a nonprofit organization that places reporters in newsrooms to cover underreported issues and communities, and he attended the annual Investigative Reporters and Editors conference in 2021. Pete has discussed his reporting in interviews with outlets including the Columbia Journalism Review and WBEZ (Chicago's NPR station). He’s been a panelist at the Chicago Headline Club’s FOIA Fest and he received the Institute on Political Journalism’s $2,500 Award for Excellence in Collegiate Reporting in 2017. An essay he wrote for Grey City magazine was published in a 2020 book, Remembering J. Z. Smith: A Career and its Consequence.