Millions of Americans rely on their 401(k) to ensure a comfortable retirement, but new research from Vanguard found that many workers may be falling prey to a common trap that could cause them to lose thousands of savings, or even as much. like $300,000.
The problem revolves around a typical experience of an American worker: changing jobs. When people move to a new position, they are often paid more – but at the same time, they often make the mistake of enrolling in their new 401(k) plan at a lower contribution level than their previous employer .
The resulting irony is that while many Americans enjoy higher incomes due to a job change, they often end up saving less in their 401(k), jeopardizing the growth of their nest egg. . One reason, Vanguard researchers found, has to do with the fact that the most common default savings rate in the 401(k) plan is 3 percent, so when workers change jobs , many automatically enroll at this rate, even though they may have saved a higher percentage with their former employer.
The result creates a downward trend in savings rates as people change jobs, noted Fiona Greig, global head of research and investor policy at Vanguard and co-author of the report, which analyzed retirement and income data for more than 50,000 people who changed jobs. .
“Effectively, most people change jobs in order to get a pay rise – the typical increase was 10%,” Greig noted. “64% see a pay increase when they change jobs, but we see an opposite trend in their savings rate.”
According to their research, the typical job changer sees a drop of nearly a percentage point in their 401(k) contributions.
Over time, this can add up and deprive workers of thousands of dollars in retirement income. Take a worker who begins her career with an annual income of $60,000, then changes jobs eight times afterward – the typical number of job changes for Americans.
By reducing the amount she contributes each time she changes jobs, she will have saved a total of $470,000 in her 401(k) by the time she turns 65. But if she had kept her contribution rate steady at around 10% for most of her career, she would have $770,000 by the time she reached retirement age.
“In the most concrete terms, that’s six years less of retirement expenses,” Greig noted. “This is a significant drop in pension assets.”
The imperfect 401(k)
To be sure, 401(k)s have faced plenty of criticism in recent decades, including from New School retirement expert and economist Teresa Ghilarducci, who told CBS MoneyWatch earlier this year that the retirement plan is too “fragile” and poorly designed for the way people actually work.
For example, a 401(k) may perform well for people who work steadily throughout their careers, without interruptions due to layoffs or to care for children or other family members, their thus allowing you to build a healthy nest egg. But many Americans experience job setbacks or career interruptions, while others may face financial emergencies that prompt them to diving into their 401(k).
But, Greig notes, the 401(k) has always been a work in progress, with lawmakers, plan sponsors and employers evolving the structure of the vehicle to allow more workers to save consistently throughout their lifetime. their career. For example, when the 401(k) was launched in the late 1970s, the plans were generally voluntary, meaning workers had to join to start saving.
Now, most plans offer automatic enrollment, with Vanguard’s report finding that more than 6 in 10 workers joined companies that automatically enrolled them in their 401(k) plans. And in 2025, all new pension plans will have to automatically register workersin accordance with the Secure 2.0 law.
But Vanguard’s new study suggests that the most common default enrollment rate of 3% might be too low, given that many workers’ savings rates decline when they change jobs. One solution: Raise the default savings rate to a higher level, such as 6%, Greig said.
At the same time, workers should be aware of this pitfall when changing jobs, she added.
“As soon as you start this new job, consider maintaining what you were doing before, to allow you to take full advantage of mathematics, and sign up for annual raises so that over time your savings rate increases to as your income increases,” she noted.
