Jan 22, 2010
You might think you’ll do better when you move to a company that pays “higher” but you may be doing yourself no favor. Changing employers frequently makes it very difficult for you to save enough for retirement. Company pension plans today reward highly-paid, long-term employees significantly more than short-tenure workers. Aside from this, job hoppers also have a tendency to cash out 401(k) balances when they need money. They also move in and out of retirement coverage which leads to a smaller balance come retirement.
It should be noted that defined benefits pension take into account your average salary and the length of tenure. Employees will not receive maximum benefit from traditional retirement plan because of this formula. In fact, it is also possible for workers not to receive pension if they do not stay with their employers for at least 5 years.
Importance of 401(k) Plans
Workers who have 401(k) plans may also lose out if they don’t consistently increase their account balance. This is especially true if they don’t put assets in certain savings or investment vehicle. If they fail to tap into this source of supplemental income, they might be forced to work beyond retirement age just to sustain their living expenses.
It should be noted that certain 401(k) plans charge lower fees and provide better options for investors. Employees need to be aware that the formulas differ from one company to another. Short-term workers usually don’t get a match. According to Profit Sharing/40k Council of America, a mere 37 percent of 401(k) plans provides immediate vesting (as of 2008). Meanwhile, some plans require workers to remain with the same employer for a specified number of years before they can keep the match. It is disturbing to see that if you leave the employer before this match is vested completely, it is possible to forfeit all your employer’s contribution.
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