The 401(k) has become a cornerstone of modern working life, yet it’s easy to overlook that this employee-driven retirement savings system has only existed since 1978. Despite its widespread adoption, not every aspect of its implementation has been thoroughly analyzed or optimized. One pressing issue on the agenda is addressing the savings-rate gap for workers who change jobs—a problem that could cost individuals up to $300,000 over their careers, according to a Vanguard study released in October.
The study highlights that each time a worker changes jobs, their retirement savings rate often drops, even as their salary increases. On average, U.S. workers change jobs nine times during their careers, typically receiving a 10% pay raise with each transition. However, their savings rate tends to decline by 0.7 percentage points per job change. In an ideal scenario, workers would start with a 3% contribution rate at their first job, increase it by 1% annually until reaching 10% or more, and then maintain that level. In reality, many workers see their savings rates fluctuate—starting at 3%, rising to 6%, then dropping back to 3% with each new job.
### A Simple Solution with Complex Barriers
The solution seems straightforward: employers could ask new hires about their previous savings rate and set their new 401(k) contributions accordingly. Fiona Greig, global head of investor research and policy at Vanguard, co-authored the study and has been advocating for this change. “Plan sponsors can do something about this today—and even workers,” she said. However, implementing this solution faces several roadblocks.
#### 1. Employers Aren’t Asking Enough Questions
Greig suggests that employers could easily ask new hires about their prior savings rate and default them into their new plan at the same level. While employers already ask for the dollar amount contributed in the current year (to comply with tax rules), they rarely inquire about the percentage saved. One reason for this hesitation is cost. If a company auto-enrolls employees at 3% but matches up to 6%, a higher default rate could increase the company’s matching expenses. “That’s why some employers are still reticent to use auto-enrollment or to increase that default contribution rate,” Greig explained.
#### 2. Plan Administrators Aren’t Moving Fast Enough
401(k) plan administration is typically outsourced to firms like Vanguard, which handle the infrastructure and custodial duties. Greig emphasized the need for behavioral-finance experts to design programs that seamlessly integrate questions about prior savings rates. “We’re working on it,” she said, noting that Vanguard is exploring pilot programs and advocating for industry-wide changes. However, plan sponsors must also be willing to adopt these updates.
#### 3. Employees Aren’t Paying Enough Attention
Even if employers and plan administrators make changes, employees often overlook their 401(k) details during the chaos of starting a new job. “When you start a new job, you’re drinking from a fire hose,” Greig said. Many workers fail to notice the “fine print—but incredibly important print” of their retirement plans, such as whether they’re maximizing employer matches. As a result, their savings rates often yo-yo over time. Vanguard’s research also found that workers joining companies with auto-enrollment tend to save less, anchoring to the default rate even if they previously saved more.
#### 4. Congress Isn’t Taking Action
Government regulations further complicate the issue. Current laws prevent employers from customizing default contribution rates for individual employees. Meaningful change would require congressional action, similar to the Secure 1.0 and Secure 2.0 bills, which overhauled numerous retirement plan rules. Greig envisions a future with “auto-portability,” where plans share data on employees’ prior savings rates and carry them over to new plans. “That’s the next frontier of data-sharing,” she said. A potential Secure 3.0 bill could address this and other improvements, such as vesting protections and auto-investing of IRA rollovers, which often sit in cash and lose value to inflation.
### The Path Forward
Greig remains optimistic about the potential for change. “We can do better. Employers can help workers save and invest seamlessly, even as they switch jobs,” she wrote in a recent industry publication. She also stressed that firms like Vanguard must simplify implementation for plan sponsors by creating user-friendly campaigns and onboarding processes.
Ultimately, closing the savings-rate gap will require collaboration among employers, plan administrators, employees, and policymakers. As Greig put it, “Imagine a world where we have auto-portability.” With the right changes, that world could become a reality, ensuring workers maintain their retirement savings momentum—no matter how many jobs they change.