How Job-Hopping Can Hurt Your Retirement
Life + Money

How Job-Hopping Can Hurt Your Retirement


While job hopping has gained momentum, especially among Millennials as the stigma of switching jobs frequently has declined, this new norm appears to be affecting the amount of money saved for retirement.

The median balance in 2014 of 401(k) accounts is $18,127, according to Torsten Sløk, an international economist for Deutsche Bank. Workers who are 18 to 48 years have an average of 12 jobs in their career and half of them occur before the employee turns 25, according to data from the U.S. Bureau of Labor Statistics.

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Although changing jobs every few years is becoming more of a norm as the economy has shifted gears, this new phenomenon is hindering employees and the retirement money accumulated because workers can "have as many as six different 401(k) accounts," said Slok in a research report.

The trend is also thwarting efforts to encourage employees to save more money either through auto enrollment or auto escalation programs, because the "bottom line is that the $18,000 number often quoted is significantly lower than actual retirement savings for U.S. households," he said.

A large percentage of employees fail to roll their 401(k) plan into an IRA when they leave one company for another, paying unnecessary plan fees for many years, said David Twibell, president of Englewood, Colorado-based Custom Portfolio Group. Taking a distribution from a 401(k) instead of rolling it into an IRA means investors also pay ordinary taxes and the 10% early withdrawal penalty.

"This is usually the best option, because it consolidates the money in one place and allows you to invest it as you wish," he said. "Unfortunately, that rarely happens for most workers. As a result, many people really have no idea how much they have saved for retirement."

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Many employees also lose track of their 401(k)s and are not aware of their performance or whether they should reallocate their investments.

"As a result, the funds languish in their former employer's plan, with no one managing them or rebalancing the account," Twibell said. "Consolidating all those orphan 401(k) accounts can be a Herculean task since most employers have their own unnecessarily complex forms, processes, and procedures for transferring funds from their plans."

Job hopping is affecting the average 401(k) balance, since it is "incredibly normal to have a half dozen or even more retirement accounts during the first 10 to 15 years of a working career," said Jake Loescher, a financial advisor for Savant Capital Management, a Rockford, Ill.-based wealth management firm.

The majority of individuals fail to understand that rolling over funds from a 401(k) account into an IRA means they can invest in the "entire universe" of mutual funds, stocks and ETFs, he said.

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Other Factors Causing Low Savings

Switching jobs frequently means employees can miss out on the company matches which often require employees to work a minimum of one year or even longer. Company matches mean employees can contribute a lower amount each month and allocate the additional funds towards paying down student loans and credit cards.

"Job hopping can definitely have a detriment on retirement saving since many employer matches require a certain length of service before they vest," said Kelley Long, a Chicago certified financial planner and CPA. "I personally left about $5,000 of a match behind when I switched jobs in my late 20s, which was about one-third of my overall savings at the time."

Millennials and even some Gen X-ers have faced the continued decline of real median household incomes, which affects to the lack of retirement savings. While incomes peaked in 1999, they have been declining since then except for the brief blip which raised salaries during 2004 to 2007, said Twibell.

"If you're making less money each year on an inflation-adjusted basis, there simply isn't much left to save," he said. "That's particularly true since many household expenses continue to climb even faster than the rate of inflation."

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The personal savings rate in the U.S. has remained stagnant since 2013 and remained at 5.0% after "spiking briefly" following the financial crisis in 2008 to 2009, Twibell said.

"While that's better than the rate immediately preceding the 2008 market collapse, it still falls far short of prior decades," he said.

After two massive market crashes in less than two decades have left many investors nervous about investing in equities. Despite the market's rebound since 2008, many employees have not returned to investing in stocks or wait several years.

"Many workers don't feel like they're getting ahead," Twibell said. "In turn, this leads to a belief that the whole system is rigged to help rich investors and fleece them of their savings. Since they can't generate any meaningful return in bonds or a savings account and they don't trust the equity markets, they simply don't bother saving until later in their careers."

Too many employees have chosen to investment their disposable income into savings accounts on the belief that it is a safer investment despite the low yields and nearly zero interest rate environment.

"The Great Recession changed everything and like businesses, employees also reset their 'personal business plan' by trimming budgets, paying off debt and avoiding large purchases," said Loescher.

Aside from all companies auto enrolling employees into their 401(k) plans, a plan should be instituted to automatically transfer a worker's precious retirement funds into the new company's 401(k), said Michael Eisenberg, a registered investment advisor at Miller Ward, an Encino, Calif.-based CPA firm.

"Take this task out of the hands of the employees and have it done for them and they will be much happier when they retire," he said. "Young folks don't save enough period, and then they have to play catch up big time when get into their 40s or 50s."

Many Millennials are burdened with having to pay down large amount of student loan debts first because they carry "relatively high interest rates," said Sean Stein Smith, a Hackensack, N.J.-based CPA.

"Especially for Millennials, the lack of understanding of what the 401(k) process is about and compounding this is the fact that many people just entering the workforce are also contending with large debt burdens," he said. "Rolling over a 401k is not particularly sexy and very well could get lost in the shuffle of changing positions."

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