Switching jobs? There's more to do with your 401(k) than just rolling it over

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Job hopping is one of the best ways workers have to increase their pay, and a surprisingly solid job market means they still have opportunities. That’s great news for workers, but remember: Make sure you’re setting aside as much into your new 401(k) plan as your old one.

When a worker moves to a new job, they have to take the extra step of signing up for their new employer’s 401(k) plan and deciding how much of their paycheck to contribute. Otherwise, if they’re lucky, they’ll end up getting automatically enrolled into the plan and contributing whatever the employer decided as the default percentage of pay.

At nearly half of the 401(k) plans with automatic enrollment that Vanguard keeps records for, that default is 3% or 4%.

For first-time workers just starting their careers, that kind of contribution might make some sense, even if the rule of thumb is to save 10% to 15% of your pay. Many 401(k) plans will also automatically increase that savings percentage by 1 percentage point per year.

But for a worker in the 10th or 20th year of their career, that could mean they're suddenly contributing just 3% or 4% of their pay instead of the 15% they had been in their prior job. Even worse, for workers whose new jobs don't automatically enroll them in the retirement savings plan, they could see their contributions drop all the way to zero unless they sign up.

The total hit to a worker's nest egg could amount to $300,000. That's according to a recent study by Vanguard, which estimated what a retirement savings slowdown could mean for a worker earning $60,000 at the start of their career who switched jobs eight times across employers. That's enough to fund an estimated six additional years of spending in retirement.

The Vanguard researchers found that the typical U.S. worker has nine employers over the course of their career. Each switch sees a median 10% increase in pay but a drop of 0.7 percentage point in their retirement saving rate.

“The current design of many 401(k) plans does not account for repeated job switches,” the researchers wrote in their report.

How many people is this affecting? A little more than 3 million U.S. workers quit their jobs during August, according to the most recent data available from the U.S. government. Those are generally workers who wanted to leave their employer, and a big number is seen as a sign that workers are feeling comfortable enough to switch to another job.

It’s been trending down since hitting a peak above 4.5 million two years ago, but it remains well above its bottom of 2 million reached during the pandemic. The next update on how many U.S. workers are quitting their jobs will arrive on Tuesday.

A little more than half of all U.S. households have a 401(k) or similar plan or an individual retirement account, as of 2022, according to Congressional Research Service.