Automation making a big difference in millennials’ retirement plans
Wells Fargo, after examining the 4 million accounts of its 401(k) plan participants, found that its millennial workers are saving more for retirement when automatic enrollment and qualified default investment alternatives, like target-date funds and managed accounts, are made available.
In fact, Wells Fargo found that 85% of younger workers stay in the plan when automatically enrolled, according to a study the financial services company release titled “Wells Fargo Driving Plan Health.”
Wells Fargo finds that when younger workers are automatically enrolled into their retirement plan, 85% of them stay in the plan. When automatic enrollment is taken out of the equation, only 38% of younger workers participate in their workplace retirement plan, the report finds.
Many plan design changes came about because of legislative changes back before the Great Recession. Millennials in essence grew up with these changes.
“They are moving the needle faster on participation; they are the most diversified and have the highest usage of Roth IRAs,” says Mel Hooker, director of relationship management for Wells Fargo Institutional Retirement and Trust, of the millennial generation. “I think plan sponsors, who were early adopters and took a little more risk in being paternal with their plan participants, have really made some significant gains in a generation that gets talked a lot about not being well prepared due to financial challenges they have with student debt. To me this is a great picture. Plan design can absolutely move the needle.”
In the past five years, millennials registered the highest gains in the percentage of those participating in their 401(k) plans, with an increase of 13.3%, according to Wells Fargo. They are also the most diversified generation, with 83% being well diversified compared to 80% of generation X and 77% of baby boomers.
Well diversified is defined by Wells Fargo as when a participant is either invested in a diversified investment option like a TDF, managed account or comprehensive advice program or, if they are self-directed, they invest in at least two different classes of equity funds, at least one fixed income fund and less than 20% of their balance is invested in employer stock.
Thirty percent of millennials also contribute enough to their workplace retirement accounts to take advantage of their full employer match when one is offered, the study found, compared to 27% for GenX and 25% for boomers.
“This engagement among millennials is encouraging because the sooner they get started, the more prepared they will be for retirement because they have the power of time to help grow their nest egg,” Hooker says.
Generation X saw an 11% gain in plan participation in the past five years, but a full quarter of them have taken a loan from their retirement plan, compared to 16% of millennials and 19% of boomers.
“This may be a case of sandwich generation syndrome, where people are juggling the challenge of raising kids, helping aging parents, all during a period of increasing financial complexity in their lives,” says Hooker. “Unless you need the money for an emergency, however, it’s best to resist the urge to tap your retirement funds and, if you need to do it, be sure to understand the terms.”
The number of baby boomers who participate in their workplace plan rose by 8.3% over the last five years. Even though this is a lower increase than the other two generations experienced, there are more boomers participating in their workplace plans than younger generations, the report found.
This is an opportunity for employers to help employees of all generations better prepare for retirement. If the older generations missed out on the opportunity to take advantage of automatic plan features or a QDIA, they should go back and offer GenX and the baby boomers an opportunity to take advantage of these plan design features. Additional education might also help the older generations do a better job of diversifying their investments. Boomers currently hold more equities than they should as they reach or near retirement.
The match game
Only one-quarter of baby boomers take advantage of their employer matching contribution, “which is another area where plan sponsors could leverage with their providers to do more education and talking about the money they are leaving on the table,” Hooker says.
Millennials are the most on track to reach their retirement goal of replacing 80% of their income in retirement, with 66%. Only 51% of GenX and 41% of boomers are on track to reach their retirement goal.
Another thing employers can do to help move the participation needle is to increase the default deferral rate on their 401(k) plan from 3% to at least 6%, Wells Fargo says. Currently, slightly more than 11% of people opt out of their workplace plan at the 3% deferral rate. About the same amount also opt out of plans when the deferral rate is 6%.
“The opt-out rates aren’t different between low and high income, so this is a way for plan sponsors to make a tweak to their plan design and really amp up the contribution rate so it gets closer to the 10% contribution rate [people need to reach to save enough for retirement], including the company match,” Hooker adds.
Twenty percent of plans include an automatic escalation feature in their 401(k) plan that automatically increases an employee’s retirement plan deferral rate on an annual basis. This is a significant increase from the 8% of plans that were offering this plan feature five years ago, according to Wells Fargo.