Are Your Short Job Stints Jeopardizing Your Retirement Security?

While your 401(k) might not be your first concern when switching jobs, how you handle your old and new retirement accounts could have important consequences for your long term retirement savings.

Switching jobs can lead to higher pay, new challenges, and better opportunities. But job hopping also comes with hidden financial risks, especially regarding your 401(k). Fiona Greig, Global Head of Investor Research and Policy at Vanguard, lays out three reasons your retirement savings couple be compromised: the fine print on your 401(k), changing savings rates, and leakage.

The Fine Print on Your 401(k)

If you’ve never heard of a vesting schedule for a 401(k), you’re not alone.

“About two-thirds of people don’t know what the vesting schedule is, so this feature is not very salient to workers,” said Greig.

Many employers offer workers a 401(k) match, which means your employer will contribute to your account based on how much you contribute. While your contributions are always 100% vested—meaning you have complete ownership of that money—your employer’s matching contributions may be subject to a vesting schedule.

A vesting schedule determines when employer contributions become fully yours. Some plans require staying at a company for up to six years to get the full match. Leave too soon, and you could forfeit thousands. However, neglecting to read up on the fine print could end up costing you a lot of money because a significant number of 401(k)s have vesting schedules.

In January 2024, the median amount of time an employee had worked with their current employer was just 3.9 years, according to the Bureau of Labor Statistics. And a 2018 Vanguard study found that about 30% of workers who left jobs forfeited part of their 401(k). On average, they lost 40% of their retirement balance due to unvested employer contributions.

Another study published in the Yale Law Journal found that vesting schedules collectively cost retirement savers across 900 plans more than $1.5 billion.

Changing Savings Rates

When you switch jobs, you may be automatically enrolled in a new 401(k). But if you’re not paying close attention to your new workplace retirement plan, you could be auto-enrolled at a lower savings rate.

“Many people are overwhelmed are when they’re switching jobs. You can easily end up saving less in your next job, as a percent of your income, than you were saving in your old job,” said Greig.

This is, in part, because 401(k) plans have a default savings rate of 3%. So, if you were contributing at a higher rate to your old 401(k), you might end up contributing at a lower rate after switching jobs.

A 2024 Vanguard study found that while a median job switcher received a 10% raise, they also experienced a a 0.7 percentage point drop in their 401(k) savings rate. While these workers saved more in dollar terms at their new jobs, they could have boosted their retirement savings further if they had maintained the same savings rate from their previous plan.

Leakage

Depending on the size of your previous 401(k) balance, your retirement funds could be forced out when you switch jobs. Failing to roll over those funds into an individual retirement account (IRA) could result in a 10% early withdrawal penalty and a reduction in your overall retirement savings.

Greig refers to this as retirement plan ‘leakage’.

“When people switch jobs, a lot of people cash out of their retirement plans entirely,” she said. “If someone has less than $1,000 in their plan, they can literally be sent a check.”

For balances worth more than $1,000 but less than $7,000, employers may roll that money into an IRA. However, when funds are rolled over into an IRA, they’re not automatically invested, which means some investors could end up leaving their money in cash for years or even decades.

“One thing we observe in IRA accounts is this big cash drag. When you move money into an IRA, there is no default investment (like a target-date fund), so you’re defaulted into cash,” said Greig. “Many people, to the tune of 28% of investors, after a rollover, leave their money in cash for seven years or longer. They don’t realize their retirement assets are sitting in a money market fund.”

The Bottom Line

Frequent job changes can result in a smaller retirement nest egg, but they don’t have to. To minimize the impact job switching has on your retirement savings, pay close attention to the details of your old and new 401(k) plans.

For example, aim to maintain the same (or even a higher) retirement savings rate at your new job. And if you have an old 401(k), avoid cashing it out if possible. When you do roll over your 401(k) into an IRA, ensure that your money is invested.

Finally, while you can’t change your employer’s vesting schedule, consider whether a job switch is worth it, especially if it means give up part of your retirement savings.