How to Avoid Big 401(k) Mistakes After Changing Jobs

A 401(k) plan is one of the most common ways Americans save for retirement. However, a recent study by Vanguard found that many workers may be missing out on huge savings opportunities due to job changes.

This problem can cost them hundreds of thousands of dollars in missed retirement savings over time. Let’s explore how job switches affect your 401(k) and what you can do to ensure you’re saving enough for the future.

Why Job Changes Can Hurt Your 401(k)

Many workers in the U.S. move jobs frequently, and with these changes, their salaries often increase. However, the study found that many people don’t adjust their 401(k) contributions when they get a new job.

In fact, they often lower the amount they contribute, which can have long-term effects on their retirement savings.

When you change jobs, your new employer may automatically enroll you in a 401(k) plan. However, many plans set the default contribution rate to just 3%, which is often much lower than what you were contributing at your previous job.

This automatic enrollment at a lower contribution rate can cause your savings to grow slower than they would have if you kept contributing at a higher rate.

The Impact of Lower Contributions on Long-Term Savings

The Vanguard study found that the average worker reduces their 401(k) contribution by almost 1% after changing jobs. While this may seem like a small amount, it can add up over time.

For example, a worker earning $60,000 per year who changes jobs multiple times could end up with $300,000 less in retirement savings by the time they retire.

If they had maintained the same contribution rate throughout their career, they could have saved nearly $770,000 for retirement. This shows just how much small changes in contribution rates can affect your financial future.

401(k) Plans: A Helpful Tool, But Not Perfect for Everyone

While 401(k) plans are a great tool for many workers, they aren’t perfect for everyone. Some people may have interruptions in their careers due to personal reasons, such as taking time off to care for family members or dealing with financial problems. These breaks can make it harder to save consistently in a 401(k).

According to economist Teresa Ghilarducci, the 401(k) system might not work well for those who experience interruptions in their careers. In contrast, workers who can stay employed steadily can benefit greatly from the long-term growth of their 401(k).

How the System Is Changing

One positive change is that more employers are offering automatic enrollment in 401(k) plans, which makes it easier for workers to save for retirement.

In fact, the Vanguard study found that over 60% of workers who switched jobs were automatically enrolled in their new employer’s 401(k) plan.

Looking ahead, the Secure 2.0 Act, starting in 2025, will require all new retirement plans to automatically enroll workers.

However, the default contribution rate of 3% may still be too low for many workers. Vanguard suggests that a default contribution rate of 6% could help workers save more for their retirement.

How to Maximize Your 401(k) Savings

If you’re changing jobs, it’s important to think about your 401(k) contributions as soon as you start your new role.

One key step is to keep your contribution rate consistent with what you were contributing at your previous job. Additionally, it’s a good idea to sign up for annual raises to ensure that your savings grow alongside your earnings.

401(k) plans are an essential tool for saving for retirement, but it’s important to stay mindful of how job changes can impact your contributions.

By taking action to maintain or increase your contributions when you switch jobs, you can ensure that you’re setting yourself up for a more secure retirement.