Job switches shouldn’t slow retirement savings

Today, a worker can expect to have nine different employers in their lifetime. With increased longevity and the opportunities unlocked by technological innovations, that number could increase.¹ However, many workers experience switchbacks along their retirement savings journey when they change employers, including stalled savings, forfeiture of unvested contributions, and forced divestment of retirement assets.

We can do better. We need a retirement system in which workers can move forward on their savings journey, no matter how often they switch employers. Here are three ideas.

Vanguard research shows that a typical worker sees a 10% increase in income when switching employers but a one percentage point decline in their retirement saving rate.² And, when an employer does not include automatic enrollment in its retirement plan, one in four new hires stop saving for retirement altogether. In other cases, saving rates fall because the new plan sets a default saving rate—typically 3%—that is lower than their rate at their prior employer.

Employers can help workers maintain their savings momentum if they include automatic enrollment in their retirement plans and make it easy for new hires to continue saving at their prior plan’s rate. Defaulting workers into a saving rate of 6%—the median participant contribution rate—may also help prevent new hires from seeing a slowdown in retirement savings when they switch employers.^{2, 3}

The 401(k) system was built as an alternative to the defined benefit system, which, by design, favors tenured workers. In a workforce with more job switching, tenure-based eligibility privileges can lead to retirement readiness gaps. Today, in plans for which Vanguard serves as recordkeeper, 79% of workers are immediately eligible to contribute to the plan, 56% of workers are immediately eligible to receive employer matching contributions, and 49% of workers are allowed to keep all employer matching contributions regardless of the length of their employment.³

That said, eligibility and vesting requirements can stall contributions among younger and lower-income workers that are crucial in the accumulator stage of savings. For example, roughly 30% of workers—disproportionately lower-income employees—switch employers before their retirement savings are fully vested.⁴ When that happens, those workers forfeit an average of 40% of their account balance.

Our analysis shows that such vesting requirements often do not deliver the intended retention benefits or significant cost savings to employers.⁴ Workers are just as likely to leave in the year after a vesting deadline as the year before, and vesting forfeitures account for just 2.5% of employer contributions. Relaxing eligibility and vesting requirements could help workers start to save as soon as they join and keep their savings when they leave. 

When workers leave an employer, they often must make a choice: Take a taxable cash distribution, keep money in the plan, move it to the next plan, or roll it over to an IRA. However, those with low balances are too often forced out of plans into a Safe Harbor IRA or, worse, simply sent a check. This liquidation can result in lower returns.

Better choice architecture at the end of a job could help workers consolidate their savings, remain invested, and stay on track for retirement. 

• Employers and recordkeepers opting into the Portability Services Network would enable them to automatically transfer a worker’s balance (as long as it is below $7,000) to the next employer’s 401(k) plan. For retirement savings and tax purposes, this is a much better alternative to sending a check to the worker’s home.

• Making target-date funds a qualified default investment alternative in IRA accounts, similar to the 401(k) plan enrollment process, could have scalable impact. After leaving a job, many workers roll balances over to, and continue to save in, IRAs. However, we don’t have rebalancing tools to ensure that those assets remain invested in a diversified manner. As a result, IRAs have a higher share of assets in cash than 401(k) plan accounts, and 28% of rollover investors—most unwittingly—leave their funds in cash for seven years or longer.⁵ Defaulting IRA assets to a broadly diversified fund like a target-date fund could generate an additional $130,000 in retirement wealth for individual investors, and $170 billion in aggregate for U.S. workers each year from rollovers alone.⁵

The chance for retirement security should be accessible to all, regardless of one’s career path. Great strides have been made in plan design, but it’s rare that a worker stays with the same company their entire working life. Let’s make it easier for workers to save and invest throughout their career.