By tf-lawyer.com Recent studies suggest that workers contemplating a job change should carefully review their existing 401(k) account settings to avoid substantial losses in retirement savings. A report from The Wall Street Journal, dated October 7, draws on a new study from Vanguard, a well-known investment management firm. This research reveals that overlooking 401(k) account configurations during job transitions could lead to losses nearing $300,000 in retirement savings over a 40-year career, even with potential pay raises.
The Vanguard study points to a prevalent pattern: after landing new positions, many workers forget to enroll in their new employer’s 401(k) plan or choose lower contribution rates, even when they are automatically enrolled. While a job change might yield a salary increase of around 10%, the study indicates that retirement savings can dwindle by almost 1%.
Fiona Greig, co-author of the study and Director of Global Investment Research and Policy at Vanguard, notes that the average American changes jobs approximately every five years. This leads to a “jagged” pattern in 401(k) savings, which is at odds with the steady growth that financial experts advocate.
Greig underscores that job transitions represent a pivotal moment when retirement savings can falter, marking a significant vulnerability in the U.S. retirement savings system.
Financial advisors urge individuals to begin contributing to their 401(k) accounts as soon as they enter the workforce, aiming to boost their contribution rates annually until they invest 12% to 15% of their income in retirement savings.
Among clients participating in Vanguard’s 401(k) plans, about 60% of newly hired employees are automatically enrolled in the retirement savings program, typically with a default contribution rate of 3%. Many employers also implement automatic annual increases of 1% in contribution rates until they max out at 10%. When combined with employer matching contributions, employees could see their retirement savings grow to 12% to 15% of their income.
However, the study shows that retirement savings rates often take a hit during job changes, with recovery from these losses sometimes taking years.
The Vanguard study analyzed 54,793 workers who terminated their 401(k) plans between 2015 and 2022, revealing several noteworthy statistics:
– 64% of workers who changed jobs saw salary increases, yet only 44% kept their contribution rates consistent.
– Among employees who were automatically enrolled in retirement plans, more than half continued at the default contribution rate during their first year in a new role.
– For those who needed to self-enroll in the 401(k) plan, nearly 25% of job switchers chose not to participate.
These results point to the long-term repercussions of lower contributions to retirement accounts.
Vanguard provides a compelling example: consider a 25-year-old earning $60,000 with a 3% automatic contribution to their 401(k). If this individual increases their rate by 1% each year until reaching a target of 10%, and also takes advantage of a 50% employer match on the first 6%, they could amass nearly $800,000 in their retirement account by age 65. However, if this person changes jobs eight times, reducing their contribution rate to 3% each time, they could end up with less than $500,000 in retirement—even with annual increases of 1% in contributions.
