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Job Hoppers: Don't Forget Saving

As 20-something workers move around, focusing on the long term can be tough

Sometimes it's graduate school. Sometimes it's restlessness. Sometimes it's simply layoffs.

Whatever the reason, millennials tend to hopscotch between jobs early in their careers. And that can pose a challenge to retirement savings.

Even though job hopping didn't start with this crop of young professionals, savers in their 20s and 30s have to think about retirement early in their working life in a way their parents and grandparents didn't. With pension plans becoming increasingly rare, not paying attention to your retirement plan at the outset can lead to problems down the road.

Some people are tempted to cash out of plans when they leave a job rather than roll the money over to a new employer's plan. In almost all cases, cashing out results in a big tax hit. And when weighing new offers, job candidates often don't even consider their prospective employer's retirement-plan options.

There are some advances that can help out young savers, says Maria Bruno, senior investment analyst at Vanguard Group's investment counseling and research team. For instance, many 401(k) retirement plans include an auto-enrollment feature, which automatically funnels a default percentage of an employee's paycheck into a retirement plan, unless the employee opts out of it.

Still, that may not save workers from costly mistakes. Here are pointers on pitfalls to avoid and steps to take:

Don't Cash Out

"The absolute most horrible thing in terms of retirement is to withdraw the money" when changing jobs, says Stuart Ritter, a vice president and certified financial planner at T. Rowe Price Group. "What people don't recognize is that [setting aside] small dollars today is like planting small seeds in the ground. After a year or two it doesn't look like much, and too many people will take out the roots. But the seeds you're planting when you're young turn into giant redwoods."

Beyond the missed opportunity to let money grow, withdrawing money before the age of 59½ will, in most cases, subject the distribution to income taxes and a 10% penalty.

Retirement professionals say young savers should follow one of three options: leave the money in the previous employer's plan, roll the money into a new employer's plan or roll it into an individual retirement account.

Most people who don't cash out simply leave the money where it is when they change jobs, out of inertia. But inaction on a small account can have negative consequences, says Sarah Walsh, vice president of retirement solutions at Fidelity Investments.

A former employer likely will roll a balance between $1,000 and $5,000 into an individual retirement account, where it will sit untended. In some cases, employers holding accounts with less than $1,000 will cut the employee a check. If the employee doesn't leap into action within a 60-day window and deposit that money into a new plan or IRA, the Internal Revenue Service will assess early-withdrawal penalties.

"If the account balance is greater than $5,000, you can almost always leave it where it is" without the employer touching it, Ms. Walsh says. But that option can lead to problems, too. An archipelago of short-term jobs could lead to several small 401(k) accounts. Beyond the burden of looking at multiple account statements, having more than one account could make it more difficult to determine proper asset allocation across a portfolio and assess risk tolerance, she says.

Rolling into a new employer's 401(k) plan will enable savers to consolidate accounts and easily monitor diversification. Rolling the money into an IRA, meanwhile, could offer greater withdrawal flexibility and access to more investment options.

Ask About Benefits

Optimally, a retirement plan should be something you consider carefully when you accept a job, along with other benefits such as health coverage.

Says T. Rowe's Mr. Ritter, "Too often folks just out of college will look at salaries alone and think, 'A higher salary must be better than a lower salary,' but there's much more to the package."

Julia Bonem, a New York-based career coach, concurs. "With millennials, I usually have to raise [retirement benefits] in the conversation," she says. "Even people in their 30s and early 40s, they may not have even thought of it."

Career coaches and retirement professionals encourage young job changers to ask three key questions about retirement plans. First, will the employer match the employee's contribution, and how big is that match? Second, when are employees fully vested—that is, when are they eligible to keep the money in their account even if they leave the job?

Finally, can employees start contributing to their retirement plans immediately, or does the employer require a waiting period? In the latter case, employees can try to negotiate a higher signing bonus to compensate for the lost saving opportunity, says Sarah Stamboulie, a New York-based career coach.

While nondiscrimination laws would require a waiting period, if there is one, to be standard for all new hires, a signing bonus can be negotiated on a case-by-case basis, she says.

Consider an IRA

Finally, if an employer doesn't offer a retirement plan or requires a significant waiting period, savers may opt to open an IRA. Some employees may choose to do so in addition to contributing to a company-sponsored 401(k) plan for a breadth of investment options.

The only requirement for young savers to open a traditional or Roth IRA is earned income. A contribution to a traditional IRA may be tax-deductible, in which case all withdrawals later in life will be taxable. (See IRS Publication 590, at, for details.) By contrast, the Roth IRA option enables savers to withdraw money tax-free, though contributions are made with after-tax dollars. This route often is appealing to young savers who expect to be in a higher tax bracket when they start to take distributions later in life.


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