401(k) plans are the main source of retirement savings for millions of Americans.But according to recent Vanguard research, many workers encounter a major obstacle that could cost them hundreds of thousands of dollars in lost savings opportunities—possibly as much as $300,000.

This issue frequently comes up when workers change employment, which is a typical occurrence in the American workforce. When employees take on a new role, they usually get paid more. However, many people join in their new employer’s plan and fail to maintain or increase their 401(k) payments, even when their income has increased. Rather, they frequently make a less percentage of the total than they did at their prior position. Their retirement fund’s prospective growth is jeopardized by this cut.

Why your 401(K) enrollment is key

According to Vanguard research, one explanation is that many 401(k) plans have a default contribution rate of 3%. Even if they were contributing at a greater percentage with their previous company, employees are often auto-enrolled at this lower rate when they transfer to a new workplace.

Fiona Greig, global head of investor research and policy at Vanguard and co-author of the paper, pointed out that this trend of decreasing savings rates after job changes is a common problem. This alarming trend was shown by the study, which looked at retirement and income data from more than 50,000 people who changed occupations. As it turns out, the majority of people are changing employment to receive a pay increase; the average boost was 10%. 64% of people report higher salaries when they change employment, yet their savings rate is trending in the opposite direction.

After moving employment, the average employee lowers their 401(k) contribution by almost one percentage point, according to the study. Even though this can seem like a small change, over time, it could have serious financial repercussions. Take, for instance, a worker who starts off making $60,000 annually and, like many Americans, changes jobs roughly eight times during their working lives. This person could only have $470,000 saved for retirement by the time they are 65 if they reduce their 401(k) contribution every time they shift jobs. However, if they consistently contribute 10% throughout their career, they might accumulate $770,000 in savings by the time they reach retirement age.

This significant disparity demonstrates the long-term effects of lowering contributions.In the most concrete terms, it means six fewer years of retirement expenses, as Greig noted. It’s a tangible decline in retirement income.

Are 401(K)s the perfect option for you?

Even while 401(k) plans are crucial for many employees, there are some people who disagree with the structure. Teresa Ghilarducci, a renowned economist and retirement specialist from The New School, is one such critic who has expressed reservations regarding the layout and efficacy of 401(k) programs.

For people who can work consistently throughout their careers without major disruptions, including layoffs or breaks to care for family members, a 401(k) can be a good option. These people are able to accumulate a retirement money over time. However, a lot of employees have to take time off, deal with financial problems, or endure career upheavals, which can cause them to withdraw from their 401(k) accounts and impede the growth of their savings.

Greig admits that the 401(k) plan has changed over time, with enhancements meant to facilitate employees’ ability to save. Participation in 401(k) plans was initially voluntary when they were first introduced in the late 1970s, requiring employees to consciously decide to enroll and begin saving. Since the system now uses automatic enrollment, it is now simpler for staff members to start saving money without having to do anything. Indeed, according to the Vanguard survey, almost 60% of employees who changed employment joined organizations that automatically enrolled them in a 401(k) plan.

The Secure 2.0 Act mandates that all new retirement plans automatically enroll employees beginning in 2025. The common default contribution rate of 3%, however, appears to be excessively low, according to Vanguard’s data, particularly considering that employees often contribute less when they change employment. Greig proposed that this problem might be mitigated by a larger default rate, perhaps 6%.

When switching jobs, employees should also take the initiative. As Greig said, as soon as you begin your new work, consider continuing to do what you were doing previously. This will allow you to fully benefit from the math and sign up for annual increases, which will raise your savings rate over time as your wages improve.