5 Ways Changing Jobs Puts (Your) Retirement at Risk

 Changing jobs can be a time of great energy and excitement — but if you’re not attentive, it can also undermine your retirement security. Here are five ways it can do so.

Cashing It Out

Probably the biggest job change risk to retirement security is the rollover decision. Generally speaking, most with balances less than $1,000 are automatically issued a check of their savings minus income tax and 10% penalties, those with between $1,000 and $7,000 are given two other options to cashing out: to roll over assets into a qualified IRA or to transfer to a new employer’s plan, while those with balances over $7,000 also have the option to leave their account with that old employer plan.

As you might expect, smaller balances are not only the most likely to be those of lower income individuals, but they also tend to be lower tenured and are more likely to be women. Oh — and if that individual has an outstanding loan? Well, that’s where the real “leakage” occurs. Remembering of course that there will be federal and possibly state/city taxes netted against it, not to mention a 10% penalty for all that are less than 59 ½.

Sizing the impact of this leakage is complicated, but the Employee Benefit Research Institute (EBRI) has estimated that each year approximately 40 percent of terminated participants elect to prematurely cash out 15% of plan assets. For 2015, EBRI estimated that $92.4 billion was lost due to leakages from cashouts.

Putting It in a Money Market ‘Mattress’

Even those who manage to successfully rollover their balance to an individual retirement account (IRA) can lose out on retirement account growth. A 2024 Vanguard analysis notes that 28% of rollover investors stayed in cash for at least 12 months, with minimal changes after the first three months following the contribution.

More than that, the report notes that among rollovers conducted in 2015, 28% remained in cash for at least seven years — and explains that younger investors, women, and those with smaller balances (who, of course, are the same groups that are more prone to cashouts in the first place) are especially prone to staying in cash for years following a rollover.

Which these days is pretty much the same result as sticking in under your mattress.

Leaving It ‘Behind’

In view of the hurdles cited above, it should come as no surprise that some go with the path of least resistance — and for some that means just leaving your account where it is. In fact, there are some recent surveys that suggest that employers are not only fine with that, there is some preference for leaving those balances — particularly larger balances — in the plan where they originated.

That’s just fine — and may even be preferable for any number of reasons — so long as you keep up with it. That said, it’s the kind of thing that’s easy to lose track of — that old employer may change recordkeepers, necessitating a new website/phone number to access your account, changes in investment options that might impact your account, or even — certainly if the balance is small enough — you just forgetting that you still have an account there. All in all, EBRI has estimated that over a 40-year period, those accumulations might add up to $1.5 to $1.99 trillion.[i]

Regardless, leaving one — or multiple — retirement plan accounts with your prior employer(s) may be the easiest thing to do at job change. However, that can make it more difficult to manage your retirement savings — and there have been situations where “forgotten” accounts have fallen prey to online theft, in no small part because they haven’t been accessed in a while, or perhaps not at all following a provider change. Just don’t let “out of sight” become out of mind.

Settling for Savings Rate Resets

Consider a 2024 Vanguard study that found that, despite having an increase in income from a job change, many workers experience a substantial slowdown in savings. The median job switcher saw a 10% increase in pay, but a 0.7 percentage point DECLINE in their retirement saving rate when they switched employers. And while most job switchers (64% of the income sample) experienced a boost to their income, just 44% increased or maintained their saving rate from their prior job.

Most (55%) actually DECREASED their saving rate in their new job. Arguably not because they intended to, but because they simply drifted along with the default savings rate at their new employer. Even when they experienced a pay increase of more than 20%!

Taking a New Job Without a ‘New’ Plan

A new analysis by the Employee Benefit Research Institute (EBRI) finds that when a worker did have a retirement plan at a job, they were more likely to stay at that job compared with workers who did not have a plan. The report notes that, for example, in 1996, 76.8% of retirement plan participants were still at the same job they had had in 1994 compared with just 58.1% of those who were not retirement plan participants.

On the other hand, among workers who changed jobs from 1996–2022, an average of 43.8% moved from a job without a retirement plan to another job without a retirement plan, while an average of 20.9% had a retirement plan at both jobs.

That said, only an average of 15.3% gained a plan upon job change. while an average of 20% lost access to a plan via work.

All that said, perhaps the most encouraging statistic comes from a recent Schwab survey of stock plan participants — and while that might be an unusual subset, according to the survey, 82% of respondents consider a 401(k) plan a must-have benefit when evaluating a new job, surpassing health insurance coverage at 78%.

Because, as we know, access to a retirement plan at work is the very best way to help provide for a financially successful life after work.

In sum, when making a job change, you should:

1. Look for ways to avoid taking a distribution (and incurring the substantial taxes).
2. Look to see if the new employer has a retirement plan — and whether it permits rollovers or not.
3. Make sure your rollover balance is properly invested.
4. Make sure your savings rate in the new plan keeps pace with your previous — and perhaps more if you got an increase.
5. And while you’re at it — it’s a good time to do a retirement readiness check-in to make sure that the plans for retirement are current.

-              Nevin E. Adams, JD

[i] There have been some ridiculous projections as to how much this adds up to. The point is valid — the math, not so much. See The True 'Cost' of 'The True Cost of Forgotten 401(k) Accounts.'