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.
Plus, not all 401(k) matches are created equal. The average company contributed 2.9 percent of employee pay to a 401(k) plan in 2008, according to the Profit Sharing/401k Council of America. But the average obscures a wide diversity of 401(k) matches, ranging from just 25 cents for each dollar contributed to over $1 for each dollar the employee saves. A smaller 401(k) match is effectively lower compensation, so you need to make sure that a lower 401(k) match doesn't cancel out the higher salary a new job offers.
401(k) disparities. The typical 401(k) plan has about 18 investment options, and their corresponding fees vary widely among 401(k) plans. If you switch into a 401(k) with higher fees, your nest egg will grow more slowly. "The lower fees you pay, the more money you are going to have in retirement," says Joshua Itzoe, principal at Greenspring Wealth Management and the author of Fixing the 401(k). "Try to keep your expenses as a participant under 1 percent. There's no reason a participant should pay more than 1.25 percent for everything." In extreme cases, 401(k) fees can cancel out the benefits of saving for retirement in a tax-deferred account. "Many companies have such horrible 401(k)'s that the employee is well served not to invest in them past the point where they get the match," says Armstrong. "The drag of 3½ percent costs on an annual basis applied to the total amount invested swamps the benefits of tax deferral."
Cash-outs. Many workers cash out their 401(k) plans when they leave a job, especially when they have a small balance. American workers took about $74 billion from their retirement accounts when they job hopped in 2006, according to a recent Government Accountability Office report. When you cash out a 401(k), generally 20 percent of your account balance is withheld by your employer for federal and state income taxes due on the amount withdrawn, and those under age 59½ must also pay a 10 percent early withdrawal penalty. "Taking it out is generally a terrible idea," says Solin. "Because of the tax penalty and regular income tax, you will have only a fraction of what is in the plan."
For example, a 1970-born 401(k) participant who saved 6 percent of pay annually beginning at age 21 plus a 3 percent employer match would typically accumulate $588,049 by age 65, according to GAO calculations. But if the same participant cashed out his nest egg at age 35 when he switched jobs and paid the tax penalties, he would have only $404,431 at retirement age. And this calculation assumes the worker immediately moves into a new job and saves the same amount with an identical employer match, which could be difficult for a laid-off employee to do. Job hoppers can avoid early withdrawal penalties and continue to enjoy tax-deferred growth by leaving their nest egg with their old employer, rolling their account balance over into a new employer's retirement account, or transferring the balance to an IRA.
Pension formulas. Many pension formulas reward long-term and highly paid employees more than workers with a shorter job tenure. Consider a worker who is covered by a traditional pension that pays 1.5 percent of final earnings for each year of service. Someone who begins working for the company at age 30 and retires at age 62 with a final salary of $55,000 would be entitled to an annual benefit of $26,200 per year in retirement, according to calculations by the Center for Retirement Research at Boston College. But if the same worker switched jobs at age 45, when he was earning $35,000, to a firm with an identical pension plan and salary, he would have a combined benefit from both pension plans of only $20,900. If you're fortunate enough to have a job with a traditional pension, your retirement benefits will generally be higher if you stick with the same job.