Job hopping has emerged as a effective strategy for employees seeking to enhance their salaries, and with a notably strong job market in play, numerous opportunities remain available. This is undoubtedly positive news for workers; however, it is crucial for them to ensure they are contributing adequately to their new 401(k) plans as they transition from their previous jobs.

Upon starting a new position, workers must take the initiative to enroll in their new employer’s 401(k) plan and determine their contribution rate from their paycheck. In many cases, if they do not proactively enroll, they may find themselves automatically enrolled in the plan at a default contribution level set by their employer, which could be around 3% or 4%—a figure that is common in nearly half of the 401(k) plans with automatic enrollment tracked by Vanguard.

For individuals entering the workforce for the first time, such a contribution rate can be quite reasonable, particularly as a starting point. Nonetheless, financial experts often recommend saving between 10% to 15% of one’s income for retirement. Many plans also have provisions to automatically increase contributions by 1% each year, which could benefit new employees. However, for those who are well into their careers—perhaps in their 10th or 20th year—this lower contribution could significantly undermine their overall savings, reducing their retirement contributions from 15% down to the minimum set by the employer. The consequence could be even more severe for workers whose new positions do not automatically enroll them, potentially leading to zero contributions unless they take action to sign up.

According to a recent analysis by Vanguard, the long-term impact on a worker’s retirement savings could be quite substantial, amounting to a reduction of $300,000. This estimate is based on the scenario of a worker starting with an annual salary of $60,000 who changes employers eight times throughout their career. Such a deficit could translate to the loss of six additional years of retirement expenditures. The study noted that the average American worker tends to have around nine employers during their career. Each job transition is typically accompanied by a median salary increase of 10%, but simultaneously, there is an observed decline of 0.7 percentage points in the retirement savings rate.

The researchers emphasized in their findings that the current framework of most 401(k) plans does not adequately address the reality of frequent job changes among workers. As of the latest data, slightly more than 3 million American employees left their jobs in August, highlighting a willingness among workers to explore new employment opportunities. While this figure has decreased from a high of over 4.5 million two years prior, it remains significantly above the low of 2 million seen at the height of the pandemic. The next report detailing the number of U.S. workers resigning from their positions is expected to be released on Tuesday.

As of 2022, it was noted that just over half of all U.S. households either participate in a 401(k), hold a similar plan, or manage an individual retirement account, as per data from the Congressional Research Service. This indicates a critical need for workers to remain vigilant about their retirement contributions, especially during periods of job transitions.