Personal Finance

Here's how chasing a bigger raise could cost you

Key Points
  • The average salary increase this year is 3 percent, according to new data from advisory firm Willis Towers Watson.
  • "Job switchers" have seen faster wage growth than "job stayers."
  • Workers leaving a job should create an exit plan to limit their potential losses.
Mark Edward Atkinson | Getty Images

Job hopping may be your best bet at a big salary bump, but changing employers can also entail losing a lot of money.

Workers are in for another lackluster year of pay raises. A new survey from advisory firm Willis Towers Watson found that companies expect to award an average increase of 3 percent for employees and managers — the same rate they've given each year for the past three years.

Willis Towers Watson surveyed 819 companies earlier this year.

Raise potential varies by performance. Workers with the highest performance ratings can expect an average salary increase of 4.5 percent, the survey found, while those with average ratings can expect 2.6 percent and below-average ratings, 1 percent.

One way to score a bigger salary? Switch jobs. Job switchers saw their wages grow nearly a percentage point more over the past year than job stayers, according to a recent report from Nomura. The investment firm looked at early 2017 data from the Atlanta Fed Wage Tracker and the ADP Workforce Vitality Report.

Experts say poor planning for that job transition could result in losses that offset your new, higher salary — potentially to the tune of tens of thousands of dollars.

"You don't want to do something hastily," said Janet Stanzak, a certified financial planner and the principal of Financial Empowerment in Bloomington, Minnesota. "Give it some really intentional thought and planning so you don't lose out."

These are some of the potential exit costs of switching jobs:

1) Company retirement contributions

Switching jobs could set back your retirement savings on several fronts. The first potential loss: employer contributions that have yet to be awarded.

That may include profit-sharing contributions awarded only to employees still in service on set dates, said Stanzak, but may also comprise the employer match for your savings. About one-third of companies award their match on a different schedule than "per pay period," including 5.2 percent that's matched annually and 3.2 percent monthly, according to 2016 T. Rowe Price data.

Some of the employer contributions already in your retirement account also may not be yours for the taking, said Rob Austin, director of research for benefits administrator Alight Solutions. Only 20.7 percent of employers in the T. Rowe Price assessment immediately vested contributions. The rest use a slower schedule. (See chart below.)

Company vesting schedules

Vesting schedule Percentage of companies*
1-year cliff2.1%
2-year cliff1.2%
3-year cliff0.9%
5-year cliff0.3%
6-year cliff0.2%
2-year graded3.7%
3-year graded19.8%
4-year graded6.6%
5-year graded25.7%
6-year graded16.2%
7-year graded2.6%

Source: SOURCE: T. Rowe Price. *Based on plans with identifiable vesting schedules.

The average forfeiture in job transitions is $1,520, or 18 percent of the account balance, according to data Fidelity Investments pulled for CNBC. The firm looked at 655,000 workers who left a job during the first nine months of 2016, and either rolled over or cashed out their balance. (See chart below for a breakdown by age.)

Looking ahead to the new job, you could also potentially lose money if you aren't immediately eligible for the 401(k) plan. There can be a lag of weeks or months between your start date and when you're allowed to contribute, or when you'll receive a company match, Austin said.

Job-hoppers who lose unvested retirement funds

Generation Percentage who forfeited savings Percentage of balance lost
Gen X26%16%
Baby Boomers11%12%

Source: SOURCE: Fidelity Investments

2) Bonuses

Workers in bonus-earning fields have the potential to lose out at both jobs during their transition. Leave before the review cycle — or in some cases before an already promised bonus is paid out. You typically forfeit that money, said MaryJo Fitzgerald, a community expert with career site Glassdoor. At the new job, you may not be immediately eligible for bonuses, based on training time or other considerations.

If you received a signing or relocation bonus, there can be requirements that you pay back some or all of that money if you leave the company within a certain time frame, Stanzak said.

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Workers who have received a bonus in the form of stock options should also review the terms, she said. Under many companies' policies, if you don't exercise vested options within 90 days of leaving, you lose them entirely.

"That can be a really significant piece of wealth," said Stanzak.

3) Vacation days

The typical worker uses only 54 percent of eligible vacation time, according to a recent report from Glassdoor. When you leave a job, state law determines the value of that unused time.

According to legal guide Nolo, only about half of states require employers to pay out unused vacation time when your employment ends. Even if state law doesn't require it, employers may do so as a matter of policy, said Carol Sladek, a partner and work-life consulting leader at human resources outsourcing firm Aon. Or you might get nothing.

A payout might not be as big as you anticipate, either. It's common for company policy to have vacation time accrue over the calendar year, Sladek said — meaning if you leave your job in July, you may only be entitled to a payout for half your annual allotment, less any time you've already taken.

In rare cases, you might owe your former employer money. Some state laws let the company deduct borrowed time from your last paycheck if you've used more vacation time than you accrued at the time you leave, Sladek said.

4) Flexible spending account funds

If you're using a pretax flexible spending account for health care, dependent care or commuting costs, think about using those balances before your last day on the job.

"Generally, your coverage ends the day of your termination, in some cases, the end of the month of your termination," said Jody Dietel, chief compliance officer for WageWorks, a benefits administrator for such programs.

You usually still have a short window to submit claims for eligible expenses already incurred, but you can't make any new transactions (say, by buying a new pair of prescription glasses or paying the following month's day-care bill), she said.

The good news: You might not lose much, and could even come out ahead.

Health care FSAs are front-loaded with the full balance available from the start of the year. That means it's possible that you've already spent more than you've paid in. If that's the case, the company typically can't claw back any of that extra spending, Dietel said.

5) Educational reimbursement

Nearly 9 in 10 employers have a program to reimburse employees for college classes up to a median maximum $7,500 per year, according to Aon.

But one common requirement for college aid is that you remain with your employer for a set period after reimbursement — usually, one year, said Aon's Sladek. Leave before that, and you'll have to pay the company back.

(It's also not unusual for companies to require new employees to serve for a set period before becoming eligible for reimbursement. Switch jobs mid-degree, and you'll likely find a semester or two of coursework isn't covered.)

6) Retirement plan loans

One in 5 workers eligible to borrow from a retirement account had an outstanding loan at the end of 2014 (the most recent data available), according to a 2016 briefing from the Employee Benefit Research Institute. The median balance: $4,239.

Companies have different ways of treating that debt when you leave your job, said Alight Solutions' Austin. They may or may not give you a short window to repay the balance in full; otherwise, it immediately becomes a distribution, triggering taxes and an early withdrawal penalty.

"You could be in for a surprise," he said.

7) Health-care changes

If your health-care needs entail more than an annual physical, keep this in mind: Signing on to a new health plan mid-year means starting from scratch on spending toward the deductible and out-of-pocket maximum.

"For some people, that's several thousand dollars," said Karen Frost, senior vice president of health strategy and solutions for Alight Solutions.

Depending on your health-care needs and the timing of the job switch, it may make more sense to elect for continuing coverage under COBRA for the rest of the year than to reset the clock with a new plan, Frost said.

In the new job, there could be a gap before you're eligible for coverage, Dietel said, potentially affecting both costs and care. In 2016, nearly three-quarters of new employees faced a waiting period before health coverage kicked in, with the average lag nearly two months, according to the Kaiser Family Foundation.

"The biggest summation is, don't just look at the money," she said. "It's not just about money. It's about quality of life and continuity of care."

How to limit exit costs

Research company policies. Before you give notice — and ideally, even before you start your job hunt — collect details on policies for your current employer related to bonuses, retirement vesting schedules and other pertinent benefits. Note any anniversaries or other key dates that would allow you to leave less money on the table.

Create an exit strategy. Based on what you find, come up with a plan to minimize what you're leaving on the table. You might take advantage of final weeks to spend down an FSA, for example, or take a few weeks' vacation that would otherwise be lost.

Beef up your emergency fund. Rainy-day money could help ease transition costs like lost income due to a missed bonus, or help cover expenses such as the claw back of an educational reimbursement, said Stanzak. (Relocating workers may have other expenses worth anticipating, too, like covering moving costs.)

Examine new benefits. A better understanding of benefits could help you decide if a job offer is worth taking. It can also provide additional negotiation points, such as paid vacation time or access to parental leave, said Fitzgerald. Advance knowledge can also help you plan financially for gaps, such as a delay in 401(k) eligibility or a wait on health insurance.

Time the transition. If you're close to a key date for a bonus or retirement vesting, it may be worth trying to negotiate a later start date at your new job to stay in the current one a little longer, said Austin.

Monitor exit to-dos. Take note of any financial moves you'll need to make after you leave your current job, Stanzak said. That might include electing COBRA coverage for your health plan, exercising stock options or rolling over a small 401(k) balance.