Millennials at high risk of outliving retirement savings
If the retirement age doesn’t rise along with life expectancy, millennials will spend as many years in retirement as they do in the workforce, according to a recent white paper by CREATE-Research and Principal Financial Group. Moreover, this generation also carries the highest risk of outliving their savings. So, improving financial literacy should be a priority for plan sponsors, retirement plan providers and employees.
“There’s all sorts of parties with vested interests here,” says Barb McKenzie, senior executive director and COO at Principal Global Investors.
Her company offers bundled solutions in the 401(k) space, including recordkeeping, helping plan sponsors figure out investment options and providing plan participant education. She says education has become an important topic of discussion among plan sponsors, many of whom want to know how best to connect with their employee base.
“I think we and others in the industry are also grappling with the issue of how plan participants want to consume that educational material,” McKenzie says. “There are a lot of experiments going on around Web-based delivery.”
Younger people like to do everything at their own pace, in their own time and in their own space. Many are “profoundly uncomfortable having a discussion about retirement and are more uncomfortable doing it with their colleagues in the workplace. That creates barriers, obstacles,” she says.
The Pension Protection Act of 2006 had a major impact on the retirement industry because it enabled plan sponsors to do three things: auto enroll participants into a workplace retirement plan; implement automatic escalation; and use target-date funds as a default option.
“It used to be plan sponsors could only use money-market funds or stable-value funds as the default option. You had a lot of young people coming into pension plans. They were contributing but not taking enough risk. That piece of legislation has had a profound impact on the landscape but not yet enough,” McKenzie says, adding that “people need to invest a bit more time in themselves, to get to the point where they have ownership in their retirement future. And that’s a cultural shift, much as it was a cultural shift when a lot of the big safety net programs were introduced in the United States.”
Workers today face a double whammy, she says, by being forced to take charge of their own retirement savings through 401(k) plans and IRAs while also living longer. That’s why it is so important to get plan participants thinking about their own retirement readiness, she says.
“What really resonates with different audiences? How do you best help people get through the enrollment cycle in a non-threatening manner without a lot of time but give them enough confidence to get through that?” says McKenzie.
Many companies employ multiple generations of workers and different people consume information differently.
The report discusses behavioral science and the different impediments that get in the way of people doing a good enough job saving for retirement, such as overconfidence or a belief they will be healthy enough to work until they’re 80.
And it’s not just a U.S. problem, according to the report. The key is for plan providers, financial advisers and plan sponsors to work closely together to try and fill the gaps in people’s financial literacy, says McKenzie. That could mean delving into other financial issues besides retirement savings, such as using credit wisely and not holding too much debt.
“I think that the main thing lacking at this point continues to be [retirement plan] participation or deferral rates, so anything we can do to get more people involved in the system, and especially to get them to defer more into the program, is just critically important,” McKenzie said.