Rosalind Evans
Millions of Americans rely on their 401(k) plans for a secure retirement, but new research from Vanguard reveals a common misstep that could cost workers up to $300,000 in savings. This mistake occurs during a typical career transition — when employees switch jobs, they often reduce their 401(k) contribution rates, even though their incomes increase. This miscalculation can significantly diminish retirement funds over time.
The Impact of Job Switching on Retirement Savings
Switching jobs often leads to a pay raise, with the average worker receiving a 10% salary bump. However, many workers unknowingly enroll in their new employer’s 401(k) plan at a lower contribution rate than they had at their previous job. Vanguard’s Fiona Greig, global head of investor research and policy, explained, “Sure enough, most people are switching jobs to get a pay raise — the typical raise was 10%. 64% see a pay increase when they move jobs, but we see an opposite trend in their savings rate.”
Vanguard’s study found that workers who change jobs typically lower their 401(k) contributions by nearly one percentage point. While the default contribution rate in many 401(k) plans is 3%, many workers have been saving more in their previous jobs. Over time, this decrease can add up to a significant loss in retirement savings.
The Long-Term Cost of Lower Contribution Rates
Lowering your 401(k) contribution rate each time you switch jobs can drastically affect your savings throughout your career. For example, a worker earning $60,000 annually who changes jobs eight times throughout their career could save around $470,000 by age 65 with a reduced contribution rate. However, if they had maintained a consistent contribution rate of 10%, they would have accumulated $770,000 — a difference of $300,000.
“In the most tangible terms, it’s six fewer years of retirement spending,” Greig noted. “It’s a material drop in retirement wealth.” This emphasizes the importance of maintaining or increasing your contribution rate when you switch jobs to make sure you get all the substantial savings.
Challenges with the 401(k) System
While 401(k) plans are a popular retirement savings vehicle, they have flaws. Teresa Ghilarducci, a noted retirement expert, has criticized the system as “flimsy” and poorly designed for the realities of modern work. She pointed out that 401(k)s work best for people with uninterrupted careers. However, many Americans face job setbacks, career breaks, or financial emergencies, forcing them to invest their savings early.
However, Greig mentioned that the 401(k) system has improved. Automatic enrollment has become more common, with 60% of workers now being automatically enrolled in their company’s 401(k) plan. Starting in 2025, automatic enrollment will be required for all new retirement plans under the Secure 2.0 Act. Still, the default savings rate of 3% needs to be higher, and Greig suggested increasing this rate to 6% to help workers save more effectively.
How to Avoid This Retirement Pitfall
Workers must take proactive steps when switching jobs to avoid this costly mistake. Greig offered this advice: “The minute you start in that new job, think about maintaining what you were doing before, to allow you to fully take advantage of the math, and sign up for annual increases so over time the increase your savings rate as your earnings go up.” By keeping your 401(k) contributions steady or increasing them, you can maximize your retirement savings and avoid losing hundreds of thousands of dollars.
Switching jobs can be an exciting time for career growth, but it’s essential to maintain or increase your 401(k) contributions during these transitions. As Vanguard’s research shows, lowering your contribution rate could cost you as much as $300,000 in retirement savings. You can ensure a more secure and comfortable retirement by staying vigilant about your savings rate and signing up for automatic increases.
