David Shi walked away from his job at American Express with $7,000 more in his 401(k) account than he would have had if he resigned even a day earlier.
After graduating from the University of Pennsylvania in 2013, David started working in the company’s Strategic Planning Group (Disclosure: I also worked in this group in 2011-13). While he enjoyed the breadth of projects and exposure, he realized his passion was more narrowly focused on mergers and acquisitions and started looking for external roles. Shi received the incremental cash by researching Amex’s policies and ultimately holding off on resigning for six weeks. “Amex’s profit sharing contributions to my 401(k) didn’t vest until I hit three years of service,” Shi told me recently from his new job at Atlas Holdings, a mid-market private equity firm. “I waited to ensure my tenure was officially three years, which enabled me to keep the $7,000.”
Shi is hardly alone in changing jobs relatively soon after landing his first one. The 2016 Deloitte Millennial Survey revealed that 25% of millennials expect to leave their job within one year and 66% hope to have moved to a new job by 2020. In fact, with the economy gaining steam, the Bureau of Labor Statistics reports that the number of Americans who voluntarily quit is at its highest since 2006, with 3.1 million people leaving their job in December 2015.
While job-hopping is becoming increasingly common, many employees don’t time their exit strategically; they end up short-changing themselves and leaving thousands of dollars on the table.For example, a Fidelity study done for CNNMoney found that of 500,000 respondents who switched jobs, "a quarter left behind retirement savings, on average $1,710." It behooves job hoppers to minimize the amount of money they lose from their old employer before resigning.
If you’re a millennial about to make a job change, arm yourself with detailed knowledge of important compensation categories (outlined below) and follow this simple four-question framework:
- Identify: What are all the forms of compensation I am currently receiving?
- Research: What policies, restrictions and dates do I need to be aware of?
- Quantify: How much money would I forgo if I left before a certain date?
- Negotiate: Can I push back my exit date or is my new employer willing to compensate me for an earlier start date?
Employer Retirement Contributions
"Many young workers are not staying at their jobs long enough to retain all the money employers contribute to their 401(k)’s,” the Fidelity study concluded in a section focused specifically on millennials. "More than a third of millennials left behind an average of 24% of their [retirement] account balance after leaving their job.”
To avoid joining this regrettable club, it is important to understand the mechanics of two payment types: profit sharing and matching contributions.
Some companies augment their employees' retirement savings with profit sharing, schemes that give employees a percentage of profits based on company earnings. The majority of profit sharing plans have a vesting requirement according to the latest report from BMO Retirement Services. This means an employee has to wait a certain number of years before having full rights to the funds the employer contributed.
Each company uses its own vesting schedule, so you will need to know the answers to such questions as: How long before contributions vest? Is the vesting graded or cliff? If vesting is graded, it means a portion of the contributions become yours each year. A cliff vest means there are no partial benefits and you get the full contribution benefit only at the very end of the vesting period. To find this information, start with an employee handbook or self-directed resources on your company’s internal portal, if it has one. You may need to speak to someone in the Human Resources or Employee Relations Department as well, but make sure you understand whether those conversations are considered confidential. If not, frame questions generically.
Diving into the nuances of your company’s vesting schedule can really pay off. Shi, the UPenn alumnus, interned at American Express the summer between his junior and senior years of college. “Amex’s policy stated that if you started working full time within 12 months of your internship, the entire year counted as a year of service. So essentially, I only had to work full-time for two years after graduation in order to earn three years of tenure and have the profit sharing fully vest.”
Employer Matching Contributions
One of the principles I emphasize to my personal financial management students is the benefit of contributing enough to your retirement account to get the full employer match. If you are earning an annual salary of $60,000 and your employer offers a full match up to 5% of your salary, you’ll have an extra $3,000 at the end of the year by contributing 5% to your retirement account. This is a guaranteed return on your investment that surpasses anything you’re likely to see in the market.
However, when you switch jobs, there is an additional element you need to consider carefully: the frequency at which your company matches contributions. The best plans match each paycheck, but between 10% and 25% of employers only match contributions quarterly, or worse, yearly. For example, while it has a very generous program, IBM is often cited as the most egregious offender of infrequent matching because it does so only once a year. Find out if your company offers a quarterly or yearly match and, if it does, consider timing your departure date for after the match. Otherwise, this is an item you should negotiate with a potential employer. A new employer can compensate you for the forgone amounts through a match of their own or in other ways, such as a higher signing bonus.
Consider the example cited earlier of someone with a salary of $60,000 . Missing a single end-of-year match would result in a loss of $3,000 in matching contributions. Without adjusting for inflation and assuming your account grows at an average annual rate of 7% over 40 years, that $3,000 loss would compound to close to $45,000.
For those fortunate enough to receive a year-end bonus, the magnitude of the payout can easily make it the most important consideration in timing a departure. A 2014 survey by Aon Hewitt found that “91 percent of organizations currently offer a variable pay [bonus] program and expect to spend 12.7 percent of payroll on variable pay for salaried exempt employees in 2015.” For a millennial on a tight budget, this cash infusion could be very meaningful and could help finance an emergency fund, pay down student loans, invest in a retirement account, or subsidize a well-deserved vacation.
Timing an exit to ensure you receive your bonus is crucial, given that many companies have policies that require you to be employed when the bonus is actually paid out, often in the first quarter of the following year. Moreover, while it is common to give an employer two-week’s notice, it is preferable to wait until the bonus has been paid and has cleared your bank account before resigning. Why? “There is no federal law which requires the employer to pay employees or even allow them to work during that two-week notice period.”
What do you do if an amazing opportunity comes up mid-year, nowhere near the payout of your bonus? While you can’t time your departure in this situation, you should engage your new employer and inquire about the bonus policy for employees starting mid-year. Some companies will pro-rate a potential bonus, but others may say that if you start after a certain date, you will not be eligible for a bonus that year. This may leave you without a bonus from either employer. Consider negotiating for a clause in your offer letter that guarantees a certain bonus level if you are starting later in the year.
Perpetual job-hoppers will also want to carefully re-read their original employment agreement to assess conditions that may require them to repay money. Payouts such as signing and relocation bonuses may be subject to minimum employment lengths. A company may even have you sign a legally binding repayment requirement agreement before you start. Agreements could include clauses stating that you’ll pay back the full signing bonus if your employment ceases within one year of service from your start date and that if you leave within two years of service, you must pay back a pro-rated share. Carefully calculate your exposure to avoid the surprise of having to return substantial sums of money when you leave.
Non-Cash Bonuses (Options/Restricted Stock Units)
Depending on your level as well as the industry and profile of the company at which you work, you may have received stock options and/or restricted stock units (RSU’s). For those who need a primer, Fidelity has a nice overview page.
Although the percentage of companies offering stock options has declined over the last decade - with 45% of large U.S. employers granting them in 2014 compared to 66% in 2004 - “an estimated 9 million employees in the U.S. held stock options” as of 2012. If you have been given options and are beyond the vesting period, educate yourself on the post-termination exercise rules that govern your company’s stock plan. These rules are crucial for vested stock options, which will expire if you don’t exercise them within a short timeframe, usually 90 days, after you officially resign according to U.S tax law.
Restricted Stock Units
Unlike options, once a portion of your restricted stock vests, it is yours to keep even if you switch jobs. If you have a substantial number of shares vesting in a few months, you may want to time your exit appropriately. Similar to a cash bonus, if you’re being asked to start before a block of RSU’s has a chance to vest, you may want to quantify and negotiate with the new company for the forgone stock.
While it may not be possible to optimize for all of these factors when timing an exit, understanding all aspects of your current compensation will help you keep more of your hard earned money. Moreover, it arms you with more ammunition to negotiate and potentially secure a larger compensation package from a future employer.
"But wait, there’s more!” to swipe a phrase from OxiClean pitchman Billy Mays.
In my next post, I’ll discuss how millennials should monetize other employer benefits prior to leaving a job, with specific examples around paid time off, health insurance, and flexible spending accounts. Stay tuned for "Job Hoppers: How to Monetize Health Benefits Before Switching Companies."
Do you have any interesting stories related to job-switching? Any categories you would add? Leave a comment or send me an e-mail. I’d love to hear from you!