Millions of Americans depend on their 401(k) plans for a secure retirement, but a study conducted by Vanguard indicates a widespread pitfall that could result in substantial financial loss for workers. The issue at hand arises when individuals switch jobs and subsequently enroll in their new employer's 401(k) plan at a lower contribution rate than their previous job, despite often receiving higher pay with the job change.
Fiona Greig, global head of investor research and policy at Vanguard, highlights a concerning trend identified in their research, showing that job-switchers tend to experience a decrease in their 401(k) contributions by nearly 1 percentage point each time they change employers. This pattern of diminishing savings rates is significant, as it can lead to the erosion of thousands of dollars in retirement income over time, emphasizing the importance of consistent and adequate savings for long-term financial security.
While automatic enrollment in 401(k) plans has become more common, with over 60% of workers being automatically enrolled in their new plans, the default savings rate of 3% may be insufficient, as indicated by the decline in savings rates observed when workers switch jobs. To address this issue, Greig suggests raising the default savings rate to a higher level like 6% to help workers maintain their contribution levels despite job changes. Additionally, she advises workers to proactively maintain or increase their savings rate when transitioning to a new job to prevent the detrimental impact on their retirement wealth.