Frequently changing jobs can make it more difficult to save for retirement. The median job tenure of American workers was 5.1 years at the same job in 2008, according to a new study by the Employee Benefit Research Institute. Some job-hopping workers move in and out of retirement plan coverage throughout their career and cash out small 401(k) balances when they change jobs, both of which will lead to a smaller nest egg in retirement. Many retirement accounts also have waiting periods before new workers may join the plan and 401(k) match schedules meant to reward long-term employees while giving short-term employees little or nothing. "You could easily work for a company for two years and forfeit the whole 401(k) match amount when you leave," says Frank Armstrong, founder of Investor Solutions and coauthor of Save Your Retirement: What to Do If You Haven't Saved Enough or If Your Investments Were Devastated by the Market Meltdown. "It's pretty dismal in terms of the number of years that people who change jobs could be out of the retirement planning system." Here is why job hoppers may end up worse off in retirement and how to avoid these traps.
Waiting periods. Workers don't always get to sign up for the 401(k) plan immediately when they start a new job. Liza Brings, 54, a data analyst in Richmond, Va., says there was a three-month waiting period before she could join her employer's 401(k). To complicate matters, her first three months employed didn't coincide with a quarterly sign-up period, so she ended up out of the retirement system for six months. "Everybody wants to stay in one job forever, but I think that way of life is gone," says Brings. The two longest-held jobs in her career were eight years each. "Every time you change jobs, theoretically you get an increase in pay so you could possibly put that money aside, but nobody does that," she says. Some companies also impose waiting periods before they begin matching 401(k) contributions. Dick Bean, 55, an attorney who started a new job on January 4, enrolled in his company's 401(k) plan right away but won't receive a match for an entire year.
Vesting schedules. While workers always have access to their own contributions to a 401(k) plan, short-term employees sometimes don't get to keep the 401(k) match. Only 37 percent of 401(k) plans provided immediate vesting in 2008, which means you can keep your 401(k) match as soon as it is deposited, according to a Profit Sharing/401k Council of America survey. Other 401(k) plans may require you to be with the company for two or three years before you can hold on to any of your employer match. And some companies impose a graduated vesting schedule in which workers retain a gradually increasing percentage of employer contributions based on job tenure. Leaving a job before you are vested could mean giving up thousands of dollars' worth of compensation. "Delaying your departure by a couple of months could have a dramatic impact on your 401(k)," says Dan Solin, senior vice president of Index Funds Advisors and author of The Smartest 401(k) Book You'll Ever Read. If you're fortunate enough to be recruited by another employer before you are fully vested in your current 401(k) plan, ask that employer to provide you with the compensation you are giving up.
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Hopping in and out of coverage. Some workers move in and out of retirement plan coverage throughout their career. IT consultant Chris Maeda, 43, of Salem, N.H., has been in the workforce for about 12 years, but for only six of those years has he worked for software companies that provided a 401(k), and none of his employers offered a match. In 2004, he started his own business, Brick Street Software, and saved some money on his own in an IRA account. "In the middle years, I sort of didn't save very much because it was a new business," says Maeda. In 2007, he set up a 401(k) for self-employed workers. "You've got to do your own IRAs for those years you are out of the system," says Armstrong.
A mixed-up match. Workers may also switch between jobs that do and don't provide a 401(k) match or work for an employer that eliminates the match. Going even one year without a 401(k) match could shrink your nest egg by thousands of dollars in retirement. For example, a 30-year-old worker earning $50,000 annually who saves 6 percent of his salary in a 401(k) and previously received a 50 percent match will have $16,000 less in retirement if he goes without a match for one year, according to calculations by Hewitt Associates, a human resources consulting firm. (The calculation assumes the employee earns 7 percent returns on investments and receives a 3 percent annual raise.) If the worker becomes discouraged after the match is cut and stops his own retirement contributions for a single year, he will have $48,000 less for retirement, Hewitt found.