A growing number of companies have changed a policy that has long hurt job hoppers: They are allowing new employees to start contributing to the company retirement plan immediately.
Companies have traditionally made new employees wait up to a year before they could start putting money in a 401(k) plan. The result has been that workers who move around a lot have paid a big penalty when it came to building their nest egg.
But a recent survey by benefit consultant Hewitt Associates found that 43 percent of big companies now allow new employees to enroll in the 401(k) right away, up from 35 percent in 2001. Steve Metz, a PricewaterhouseCoopers partner, expects the number to reach 75 percent by 2007.
Even many companies that still require a waiting period have relaxed their rules. Only 19 percent of companies now have waiting periods of six months or longer.
In January, for example, U.S. Bancorp will start granting 401(k) eligibility to new hires after just 90 days on the job. Before, the company made people wait a year before investing in the plan. The giant public-relations firm Hill & Knowlton, a unit of WPP Group PLC, made a similar change this year when it went from a six-month delay to the beginning of the month following an employee's start date. Walt Disney Co. still has a 12-month wait, but a spokesman said the company is considering shortening it to 90 days.
Companies said they are making the changes to attract better workers.
"Nurses are difficult to find in this environment," said Dennis Wade, group vice president of human resources at HealthSouth Corp., which last year reduced its wait time to 90 days from one year. Wade said the company decided to make the change before the company got into trouble for fraudulent accounting.
Taking away the waiting period comes as American workers are becoming increasingly dependent on their 401(k)s for retirement. There now is $1.95 trillion stored in private plans such as 401(k)s, exceeding the $1.59 trillion in private pension plans. The gap between the two is expected to grow as pension plans slowly disappear or are whittled away by cost-crunching companies.
The delays can costs workers hundreds of thousands of dollars in retirement savings over a 40-year career. Of course, disciplined savers instead could put money in individual retirement accounts during the years they are locked out of their 401(k)s.
But the blunt truth is that many workers won't save anything if they don't have a 401(k). Even worse, 42 percent of employees raid their 401(k)s when they change jobs instead of rolling them over into another retirement plan, a Hewitt study found.
Before Maureen Mikelson took a job with a national restaurant chain in December 2002, she made sure it had a 401(k). But after starting the job, she discovered that it would take almost two years before she could contribute to the plan.
"That was not a happy situation," said Mikelson, who left the job six months later. She says she missed out on at least $2,000 of savings in the six months she was at her old employer.
Now, the 32-year-old Mikelson works in marketing for a training company that let her start saving after a month on the job.
Changes in rules
Why have companies restricted access to their 401(k) plans for so long?
Until a few years ago, many did it to stay within government rules. Congress doesn't want the plans to become a tax haven for wealthy executives, so its laws punished employers if too few low-paid workers participated.
That caused companies to bar new employees, since they're often young, make less money, and would throw a company's internal numbers out of whack if they didn't sign up for the 401(k) right away.
The rules on how first-year hires affect a 401(k) plan's status softened in the late 1990s, which is part of the reason companies are cutting the waiting period.
Another deterrent to letting new employees into the plan is the paperwork cost associated with high turnover. Ben Brigeman, a Charles Schwab & Co. senior vice president, figures there are about $100 in administrative costs every time someone enrolled in a 401(k) plan leaves a company and wants to close an account. Multiply that by thousands of employees at companies with lots of seasonal labor or at retailers and fast-food chains with high turnover and the costs can add up quickly.
"There are some companies that will never do this," said David Wray, president of the Profit Sharing-401k Council of America, a trade group. "They just don't like opening and closing all those accounts."
He added that his organization's numbers suggested that the growth in the percentage of companies offering entry into a 401(k) plan within the first three months of employment plateaued this year at about 50 percent, after growing for several years since the rule changes in the late 1990s.
Schwab's Brigeman, however, expects still more companies to jump on the bandwagon.
"Human-resources staff have been tied up with other things, like laying people off," he says. "But this year, we've seen a pickup in plans reducing their eligibility requirements."
Job switchers lose out
Workers who can't contribute to their 401(k) right away pay a price.
Take a worker who spends 40 years at the same company, beginning with a $40,000 salary and getting a 5 percent pay raise every year. Now suppose that worker puts 6 percent of his or her salary in a 401(k) and the employer matches half of that. Finally, assume the worker gets annual returns on savings of 8 percent. The result: $1.8 million saved after 40 years, according to Christine Fahlund, a senior financial planner with T. Rowe Price Advisory Services Inc. in Baltimore.
Now, take those same circumstances but assume that the workers changes jobs every five years and is locked out of the 401(k) for a year each time. The result: $1.5 million.
Job hunters don't have much flexibility in using the 401(k) as a negotiating tool. According to federal rules, companies aren't supposed to let some people in early while barring others, so you probably won't get very far by asking for day-one eligibility with your offer letter.
Still, if your company does have a waiting period and you're someone they're desperate to hire, it can't hurt to request a retention bonus that kicks in once your 401(k) eligibility does. Ask for an amount that will make you whole given what your savings and match would have been had you been able to participate on day one of your new job.