Solving the Millennial retirement mystery, one employer at a time

You can't throw numbers at Millennials. It just doesn't work, especially in trying to convince them to save for retirement. The focus is on the here and now.

Instead, David C. Tyrie, managing director of retirement services, Bank of America Merrill Lynch, explained that HR/benefits people need to empathize with the challenges younger workers face — including mounting college and credit card debt and almost no training in personal finance.

The average college senior that graduated in 2009 had $24,000 in student loans, $4,100 in credit card debt. One in five had over $7,000 in credit card debt. And they're expected to save for retirement?

"Personal finance is not taught at the high school level and only a handful of colleges have a personal finance course," Tyrie told attendees at the 24^th Annual Benefits Forum and Expo in Dallas on Monday. "They don't have the linear view or a diminishing view of retirement; they have a more optimistic view, they don't think of how they'll retire, but how they'll reinvent themselves."

However, because they came to adulthood during a time of deep recession, they're less adverse to risk. Standard and Porter 500 annual returns in 2008 were -37%; in 2010, it was 15.1%. The markets are getting stronger and young employees are poised to start making investments for the first time. The tools already exist for them to be good investors — they just have to use them.

"You would never find a Gen Y person exercising because they want to keep the weight off so they don't have to get an expensive knee replacement surgery later," Tyrie said. Instead, they exercise because it's a 'good' thing to do and it keeps up an appearance. The same is true for financial fitness. "Physical fitness resonates with financial fitness. Work out a little bit at a time while saving a little bit at a time; it's just translating them to the financial side."

It's important because young investors are most likely to neglect determining retirement savings. Only 23% say they have figured out how much they need to save for retirement and most keep earnings in cash terms, which could prove disastrous with inflation.

"Gen Y and Gen X are sitting there in cash and they're going to get killed by inflation if they just sit there," he said. With inflation, purchasing power will decrease by 50% over 30 years. "They'll invest too conservatively and they'll get killed by this."

And the problem also lies with those who do have IRAs and a 401(k). Sixty percent of young investors cash out their IRAs when they change jobs.

"What we found is that the young folks who don't have an IRA typically [carry cash]. When they change jobs they take the money they cash it out, which is a crying shame. Even the folks who contribute, 60% cash out,” he said.

"They don't feel like they have the capacity to take risks, they have the propensity to do it, but they can't afford the error. Since they don't have much discretionary income, their asset allocation doesn't align with age. Technically they should be able to take more risk because they are younger," he added.

On top of a recent recession that left many young people without jobs and not taking risks, social security is not guaranteed. In 1950, there were 16.5 workers paying into the system for every one worker taking out. Last year, there were 3.3 workers paying for every one person taking out. It's estimated that in 2025, there will be 2.3 workers for every one person taking out.

"It's a perfect storm for them, they're paying for social security but they know it's not going to be there; pension plans are going away and inflation is increasing the cost of health care," he said.

But, if a 25-year-old starts putting away $5,000 a year in a system that was traditionally a three-pronged financial stability stool (individual, employer and government), they'll still get out a quarter of a million dollars by the time they retire.

For practical tips to encourage employees to save, he suggested:

1. Emphasize with competing priorities. "If you don't do that you'll lose them from the word 'go," he said.

2. Create an overall program of physical fitness and financial fitness. "They're not saving for a hip replacement, but that it's a good healthy habit to start," Tyrie continued.

3. Start a Financial literacy program.

4. Help them understand the tradeoffs.

5. Include their spouse or partner. "They're more likely to stick to the program and it's a healthy thing to do from a morale standpoint, he said, adding, "If you don't connect this generation, wealth will be lost."