Does Your Pension Change If You Switch Jobs?

Changing jobs often raises questions about your pension. The impact depends on your pension plan type, how long you worked for your employer, and decisions about your accrued benefits. Understanding these elements helps you make informed choices about your financial security.

Understanding Pension Vesting

Vesting determines your ownership rights to retirement benefits. It is the process by which an employee gains non-forfeitable ownership of employer contributions to a retirement plan. While your own contributions are always 100% vested immediately, employer contributions often follow a specific schedule.

Two primary vesting schedules exist. Cliff vesting grants 100% ownership of employer contributions after a specific service period, commonly three years. If an employee leaves before this period, they forfeit all employer contributions.

Graded vesting grants ownership gradually over time. For instance, an employee might become 20% vested after two years, with the percentage increasing annually until 100% vesting, typically within six years. If an employee leaves before full vesting, they may lose the unvested portion of employer contributions.

Impact on Defined Benefit Plans

A defined benefit (DB) plan is a traditional pension promising a specific payout at retirement, often based on years of service and salary history. When an employee leaves a job with a vested DB pension, the accrued benefit is “frozen” or “preserved.” This means the employee remains eligible for a future pension payment, calculated based on their service and salary up to the departure date.

This future benefit calculation is fixed at separation, even if the employee’s salary would have increased. Preserved benefits usually begin payments at the plan’s normal retirement age, often between ages 60 and 65, rather than at the employee’s new retirement date.

Managing a vested DB pension upon leaving a job offers limited options. The most common approach is to leave the benefit within the former employer’s plan as a deferred annuity, commencing payments at the specified retirement age. Some plans may offer a lump-sum payout option, but this is less common and depends on plan rules.

Impact on Defined Contribution Plans

Defined contribution (DC) plans, such as 401(k)s and 403(b)s, involve contributions to individual accounts, with retirement benefits depending on investment performance. Unlike defined benefit plans, DC funds are held in an individual account and fully belong to the employee once vested.

Upon leaving a job, employees with vested defined contribution funds have several options. They can leave the money in the former employer’s plan, though this may be unavailable for balances below $7,000, or result in a forced rollover to an Individual Retirement Account (IRA) for balances below $1,000. Rolling over funds to an IRA is another popular choice, offering continued tax-deferred growth and a wider range of investment options.

Funds can also be rolled over to a new employer’s qualified retirement plan if allowed. Taking a lump-sum distribution is less advisable, as it subjects the amount to immediate income taxes. If under age 59½, an additional 10% early withdrawal penalty applies, potentially reducing the net amount significantly.

Managing Your Pension After a Job Change

After a job change, gather information about your pension benefits. Contact your former employer’s human resources or benefits department for details on your vesting status, options, and required paperwork. This helps you understand your plan’s specifics and decision deadlines.

For defined contribution plans, decide whether to leave funds in the old plan, roll them over to an IRA, or transfer them to a new employer’s plan. When moving funds, a direct rollover is recommended. This transfers funds directly from the old plan administrator to the new account, avoiding mandatory 20% federal tax withholding and penalties. An indirect rollover, where you receive the funds first, mandates 20% withholding, and you have 60 days to deposit the full amount into a new qualified account to avoid taxes and penalties.

For vested defined benefit plans, understand when and how your deferred annuity will begin payments. Contact the former plan administrator closer to your retirement age to initiate the benefit. Keep all pension-related documentation, such as vesting statements, plan summaries, and contact information for former plan administrators, for future reference.