August 10, 2022
Big changes are afoot in the workforce. Millions of American workers are moving on—to new gigs or new industries, or just to retire earlier than originally planned. With change comes challenge, but also opportunity. This is especially so for employers with a keen eye for how to enhance retirement plan benefits to attract and retain talented workers.
Vanguard’s How America Saves 2022 report, drawn from the data of nearly 5 million retirement plan participants, uncovered a wealth of participant behaviors and trends and identified three key insights. Here we discuss one of those trends—adapting to a mobile workforce—and how it can enhance plan design and participant outcomes.
Generous benefits may help employers attract and retain talent, but the lingering effects of the 2020–2021 pandemic have inspired an unexpected rise in resignations. Whenever employees switch jobs, there is a risk that they will cash out their retirement assets. In 2021, for instance, 14% of participants who left their employers were eligible for a retirement plan distribution. Taking liquidations, however, could undo the work participants put into their plans.
Younger workers, who tend to have smaller plan balances, are most likely to cash out. Finding a way to preserve those retirement assets can help boost these workers’ retirement readiness later in life.
An automatic portability feature can help nudge participants to retain retirement assets when moving to a new employer. Keeping retirement assets intact, particularly early on, can be a significant driver of long-term retirement readiness, since assets kept in a plan can grow over the years. “A young employee with a $1,000 retirement plan balance may feel that it is simpler to cash out and pocket those funds,” said Jeff Clark, author of How America Saves 2022 and a member of the Vanguard Strategic Retirement Consulting team. “Having a portability provision makes it easier to move and preserve those balances, which can help employees’ long-term savings rates.”
Vanguard, through our work with Retirement Clearinghouse, plans to introduce an automatic portability option. The feature can also help plan sponsors simplify small-balance 401(k) rollovers—another way to enhance employees’ retirement readiness and their potential for long-term investment success.
In addition, today’s plan sponsors may be well served by planning for the inevitability of an increasingly mobile workforce. To do so, they might consider new design strategies to attract workers and adopt plan elements that ensure a continual cycle of smart saving and investing—even through job changes.
For example, a low default savings rate with a built-in automatic escalation feature may be a good starting point. But a starting point is just that—and today’s changing work landscape means that workers may find themselves starting again and again. “Let’s say employees are now switching jobs every two to three years,” said Clark. “If those participants are getting redefaulted to a 3% contribution rate after each job switch, they may find themselves in a cycle of undersaving.”
Vanguard found that after 10 years, employees defaulted at a 6% savings rate every three years have accumulated balances almost 70% greater than those accumulated by employees defaulted at 3%.
Assumes an employer match of 50% on 6% employer matching contribution
Notes: Employees change jobs every three years. Automatically enrolled at either 3% or 6%. Automatically increased in both scenarios. Employer match of 50% on 6% in each scenario. Starting salary of $50,000. Wage increases of 2% annual and 4% real return.
Source: Vanguard, 2022.
Several plan features can help ensure uninterrupted saving and consistent investing behaviors among participants, even through job changes. Plan sponsors may also consider the adoption of additional plan design options like immediate eligibility and vesting, and integrated financial well-being services.
Notes: All investing is subject to risk, including the possible loss of the money you invest.