While job switchers on average experience a 10% increase in pay when moving employers, they’re also likely to see a drop in retirement savings rates.
Vanguard’s latest study uses administrative data of over 54,000 workers for whom Vanguard is a recordkeeper for both the previous and current employer’s 401(k) plans, in order to examine how job transitions could lead to reduced savings.
The firm constructed a panel of workers who changed jobs from 2015 to 2022. They first documented the income and savings dynamics among job switchers, and then explored the impact of plan design on savings. This included plan-specific information like automatic plan features, participant-specific information, savings (in both percentage and dollar terms), and demographics including age and tenure.
According to the findings, 44% of workers who moved employers either increased or maintained their saving rate from a previous role. While the median job switcher sees a 10% salary growth, they’re also likely to experience a 0.7 percentage point decline in retirement savings, despite continuing to save more in dollar terms. Even those who experienced a pay increase of over 20% still exhibited a slowdown in their saving rate.
For example, the median job switcher with a 26% increase in pay but a 0.7 percentage point drop in their saving rate still saved $510 more at their new employer. However, Vanguard finds that if instead of switching jobs, they had received a promotion at their old employer with the same 26% salary increase, they could have saved $1,274 more in the year after their raise.
Income-wise, workers who earn $60,000 at the beginning of their career, who then switch jobs eight times across employers, could be losing out on a potential retirement savings of $300,000. This is enough to fund an estimated six additional years of spending in retirement, Vanguard reports.
The change could be due to participants consistently reenrolling in plan features that encourage more savings, like automatic enrollment and auto-escalation, the research explains. The savings lessen as workers enroll in new plans with different benefits.
“Automatic enrollment may help dampen the drop in savings that is common when switching jobs by increasing participation, but if it’s paired with low default rates, participants may still experience a significant drop in savings,” Vanguard adds in its research. “However, at a 6% or higher default saving rate, workers tend to maintain their savings momentum.”
Yet, the report notes that 68% of employers default savings rates at 3% and automatically increase the rates by one percentage point per year up to a maximum of 10%. While this design is effective for workers who remain with their employer for their entire career, it could derail savings for those who seek out roles for different employers.
Potential solutions
Vanguard’s research offers three strategies that could increase the usage of automatic enrollment features while understanding modern career paths, including:
- Higher savings default: According to Vanguard,the most straightforward remedy for savings slowdowns may be to raise the default saving rate from 3% to 6%. Recognizing that not all participants may be able to afford a higher saving rate, especially those with a lower income, authorizing emergency expense withdrawals or other liquidity features could ease potential financial strains and mitigate any drop in participation that might result from a higher default saving rate. Participants can also reduce or increase their saving rate from the default as needed to meet other financial obligations.
- Age-based defaults: Another solution added by Vanguard is to incorporate “customized” default saving rates into plan designs. Workers with longer tenure at their previous employer tend to be older and experience a greater savings slowdown when switching jobs. Setting default saving rates by age could address different savings needs across life stages.
- Personalized defaults: Vanguard’s last proposalsuggests setting an individual worker’s default saving rate to the higher of the plan default or the worker’s prior saving rate. This could involve the expansion of automatic portability via the Portability Services Network to include additional data feeds regarding the participant’s saving rate at their prior employer. Another aspect of plan customization could be proactive engagement and education at the time of hire.
More findings from Vanguard’s report can be found here.