For younger employees the possibility of an enjoyable retirement is dwindling. According to a study by Aon Hewitt, Generation Y workers can expect stagnant wages, job insecurity and a steady decline in pension plan and retiree medical benefits.
The survey indicated that anyone between the age of 18 and 30 may be most at risk from these trends despite having the most amount of time to save.
Due to lack of participation in defined contribution plans, low savings rates and high rates of cashouts, 80% of Gen Y employees will not meet all of their financial needs in retirement unless they significantly improve their saving and investing behaviors.
Aon Hewitt projects Gen Y workers will need to save 18.7 times their final pay in retirement resources, including Social Security, employer-provided defined benefit and DC plans and employee savings, to maintain their current standard of living in retirement.
Yet the research indicated that Gen Y employees are only on track to accumulate 12.4 times their final pay. The situation is even bleaker for employees without a pension plan, who have a shortfall of eight times pay.
According to Aon Hewitt, there are many reasons for these shortfalls, including rising health care costs, increased life expectancy and the emergence of DC plans as the primary retirement savings vehicle, but the biggest factor is Gen Y workers are saving less and spending more.
According to the study, only half of Gen Y workers participate in a defined contribution plan, and those that do save, only put aside 5.3% of their salary, and 41% don’t save enough to receive the entire employer-provided match.
Even if Gen Y employees begin saving early, the research indicated that most cash out their savings well before retirement. Nearly 60% cash out their retirement savings when changing jobs
"Younger workers will have fewer future benefits from their employers and potentially the government,” said Pamela Hess, the director of retirement research at Aon Hewitt.
“They need to save a third more in their defined contribution plans than workers who are nearing retirement today, but there's clearly a lack of urgency to proactively save.”
She adds: “Employers can play a critical role in helping this generation of workers by being thoughtful about offering participants the help they need to get on the right track.
Automated tools with more robust defaults, innovative matches, investment advice and personalized messaging leveraging innovative technology are effective ways to start and keep these younger workers on the right path.:
Analysts said that advisers and employers can plan an important role in helping younger employees save more for retirement. Here are some ideas from Aon to help encourage Gen Y employees to save more for retirement:
1. Adopting and/or enhancing automated tools and defaults. Automatic enrollment, coupled with solid defaults, can have a dramatic impact on all savers. More than half of employers offer automatic enrollment in their defined contribution plans, and more are adopting this feature each year
2. Acknowledging differences in learning styles and needs across generations. For Gen Y workers, communications need to be quick, easy to understand and require minimal effort. Asking younger workers to "check the box" will be much more effective than asking them to read a 30-page brochure.
3. Designing innovative employer matching contributions. Aon Hewitt's data shows that 37% of Gen Y workers only contribute enough to receive the full employer match. Employers should consider re-designing their employer matches to encourage better behavior.
4. Offering more robust investment help and advice. According to a study conducted by Aon Hewitt and Financial Engines, a 25-year-old who uses professional investment help when investing $10,000 could have $105,800 by age 65. This is more than double the $52,100 had he not used help.
5. Adopt a Roth. Saving through a Roth feature can provide significant benefits to younger workers by covering (lower) tax consequences now versus at retirement. According to Aon Hewitt, a third of plans currently offer Roth, and when available, Gen Y participants are the heaviest users.
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