Workers Who Are Excluded From 401(k) Plans

Most people change jobs several times throughout their career. But every time you job hop, it gets a little bit more difficult to save for retirement. At each new job there might be a waiting period to join the 401(k) plan or to qualify for a 401(k) match. And when you leave a job, the 401(k) plan's vesting schedule or other plan rules might limit your ability to keep employer contributions to your retirement account. A recent Government Accountability Office survey of 80 401(k) plans found that some groups of employees, including short-term, part-time and young workers, are often excluded from the company 401(k) plan or denied company contributions. Here's who might not be eligible to save in a 401(k) plan or keep an employer match and how much it's costing them in lost retirement savings.

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Workers with less than a year of service. You may not be able to save in a 401(k) plan with your first paycheck at a new job. The GAO found that 50 of the 80 401(k) plans it surveyed have a waiting period before new employees are eligible to contribute money, often requiring up to a year of service. A 30-year-old worker earning a salary of $52,152 in 2016 who faces a one-year delay in 401(k) eligibility and misses out on a 3 percent 401(k) match during that period would have $81,055 less money in savings at retirement, according to GAO calculations, which assume the worker would otherwise have saved 5 percent of his or her salary.

Saving elsewhere until you are eligible for the 401(k) plan can help to make up for the lost savings. "You want to avoid lifestyle creep, so even if you are not allowed to start deferring a percentage of your salary right away to your 401(k), you want to start saving somewhere," says Rianka Dorsainvil, a certified financial planner and president of the financial planning firm Your Greatest Contribution. "If you do not have an emergency fund established yet, this would be the first place to start saving. You want to save at least six months of fixed living expenses. If you have your emergency fund funded, then, depending on your income level, contributions to a traditional or Roth IRA may make sense."

New employees often need to wait even longer to qualify for a 401(k) match. Requiring one year of service before employees can receive a 401(k) match is common, the GAO found. Some employers require one year of service before workers can begin saving in the 401(k) plan, and then a second year of job tenure before that worker qualifies for employer contributions. "If you can prefill out the paperwork for your company to automatically start deferring your salary to your 401(k) after the waiting period is over, do it," Dorsainvil says. "If not, set a reminder on your calendar, maybe 11 months from now, to remind you to request the paperwork from your HR department."

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Young people under age 21. 401(k) plan sponsors are allowed to require workers to be at least age 21 to join the plan. A young worker who does not save in a 401(k) plan or receive a 3 percent employer matching contribution from age 18 to 20 could have $134,456 less in savings by retirement at age 67, largely due to the lost compound interest, according to GAO calculations. "Because minimum-age policies can prevent young workers from saving for retirement in their workplace 401(k) plan early in their careers, they miss the opportunity to accrue compound interest and grow their initial contributions over the remaining decades of their working life," according to the GAO report.

Part-time employees. 401(k) plans are allowed to exclude employees who work less than 1,000 hours per year, which is about 19 hours per week over a full year of employment. The GAO found that 20 of the 80 plans surveyed require employees to work a certain number of hours to participate in the 401(k) plan.

Midyear job changers. Some employers match employee 401(k) contributions every pay period or quarterly, but others delay matching contributions and make a deposit only once per year. Delayed employer contributions mean the money spends less time in your account growing on your behalf. Some 401(k) plans also have last day policies that require 401(k) participants to be employed on the last day of the year in order to receive an employer contribution for that year. If a worker leaves in the middle of the year, or even the middle of December, he or she would not get to keep the employer match for that year. The GAO estimates that a 30-year-old employee who misses out on a 3 percent employer contribution in the year he changes jobs due to a last day policy would have $29,297 less upon retirement at age 67.

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Workers with less than three (or even six) years of service. You don't get to keep the employer 401(k) contributions to your account until you are vested in the plan. In some cases employees can't keep any of the 401(k) match until they spend a specific number of years on the job, such as three years. If a worker leaves two different jobs after two years, at ages 20 and 40, and each 401(k) plan requires three years for vesting, the employer contributions forfeited could be worth $81,743 at retirement, according to GAO calculations. "If you are considering a position with a new company, do a cost-benefit analysis to see what you would be giving up in dollar terms from your current 401(k) employer contributions, and compare this to the various benefits of your new position," says Clint McCalla, a certified financial planner and founder of the Wealth Planning Company of Texas. "If you don't have the option of delaying your start with the new company, it could very well be a better long-term decision to move to a new employer now if what you are losing in vested employer contributions is made up for in other ways such as higher salary, higher bonus, better health care coverage, a 401(k) plan with immediate vesting of employer contributions, higher levels of employer 401(k) contributions, work/life balance or long-term career opportunities."

Other employers have gradual vesting schedules in which workers can keep a percentage of the 401(k) match based on their years of service, but they might not get to take all of it with them when they leave the job until they have up to six years of job tenure. While you always get to keep your own contributions to the retirement account, employer contributions that aren't vested are forfeited if you leave the job or are laid off. The plan can then keep that money to use for expenses. "If you are a month away from your 401(k) plan vesting percentage increasing from 20 percent to 40 percent with that potentially being a difference of tens of thousands of dollars to your benefit, it could make sense to stay with your current employer through that date if possible," McCalla says. "You would need to weigh those employer contributions against the benefits of the position you are considering with the new company."

Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."