The cost of switching jobs: A $300,000 loss in retirement savings

The typical U.S. worker has nine employers over the course of their career, and the design of many 401(k) plans today does not account for repeated job switches, according to the latest Vanguard research.

While pensions required workers to stay in one job for decades to benefit, 401(k) plans were meant to solve this challenge. However, there is mounting evidence that 401(k) plan design improvements over the past few decades have made it easier for American workers to save and invest for retirement, but more can be done to ensure a smoother journey throughout a career, Vanguard’s research suggests.

“401(k) plans have focused on getting people enrolled, saving, and appropriately invested,” said Fiona Greig, Global Head of Investor Research and Policy at Vanguard. “With auto enrollment, auto-escalation and matching contributions, and target date funds, plans have generally achieved those goals. People are saving more than ever.

“That said, default plan features don’t often line up between employers. If I am saving 6% in my current plan, my next employer might not auto enroll me or might enroll me at a default savings rate of 3%. These default features are very influential, often causing people to save less in their new employer than their current one.”

The median job switcher sees a 10% increase in pay but a 0.7 percentage point decline in their retirement saving rate when they switch employers, according to Vanguard. 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, say the researchers.

The majority of people who change jobs wind up  putting less of their paycheck into their 401(k)s because many either forget to sign up for the plan or get auto-enrolled at a lower rate than they had in their previous job. About 60% of 401(k) plans that use Vanguard’s record-keeping services automatically enroll new hires and the most popular default contribution rate is 3%.

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The Vanguard research, which tracked 54,793 workers who moved out of one Vanguard-administered 401(k) plan into another between 2015 and 2022, is the latest to document the mistakes people make when changing employers. Some key findings:

• 64% of job-switchers got a raise, but only 44% maintained or increased their savings rate.
• More than half of auto-enrolled workers remained at the default savings rate within the first year in a new job.
• In 401(k) plans that require workers to sign up on their own, nearly one-quarter of job-switchers failed to do so.

Employers need to “nudge workers to maintain momentum in their savings rate,” said Greig. “Employers collect a lot of information from new hires, including information about their retirement savings for the current calendar year. They could ask workers what they were saving in their last job and encourage them to continue saving at that rate if it’s higher than the default savings rate.”

Vanguard is encouraging clients to default workers at 6% or higher, said Greig. “Currently, default rates need to be ‘uniformly’ applied, so policy change may be needed to effect personalized defaults,” she said. “In addition, plan sponsors may need to consider implications for non-discrimination testing, if personalized default savings rates result in more top-heavy allocations of employer contributions.”