Design features paying off with young workers

Defined contribution plan-design features aimed at improving savings of all participants often are having their biggest impact on the youngest workers.

Best-practices features such as automatic enrollment and target-date funds are being embraced by younger employees in greater percentages than other age groups, according to recent surveys by record keepers of their clients and by researchers looking at a broader, cross-section of workers.

“Millennials are surprisingly engaged,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies, a division of the non-profit Transamerica Foundation, Los Angeles. “They are an emerging generation of super-savers.”

Wells Fargo research has found that younger workers have more diversified retirement accounts than those of other age groups, thanks to their investing in target-date funds, target-risk funds and managed accounts.

“They are off to a great start with age-appropriate products,” said Joseph Ready, executive vice president and head of Wells Fargo Institutional Retirement and Trust, Minneapolis. “They know from their parents and their employers that their 401(k) is really important — like health benefits.”

At Vanguard Group Inc., a review of participant behavior shows all age groups are benefiting from auto enrollment, but millennials are benefiting more, said Jean Young, senior research analyst with the Vanguard Center for Retirement Research, Malvern, Pa. “The sooner you get the savings habit, the better off you are.”

Even though millennials' income and job prospects had been affected by the Great Recession, “those working are, in aggregate, saving more due to automatic enrollment,” said an October Vanguard report about research that compared the same 400 client companies in 2003 vs. 2013. Participation rates grew for all age groups, but the rates grew the most dramatically for millennials — those 34 and younger — in plans that offered auto enrollment.

In 2003, Vanguard noted a 51% participation rate for millennials in the aggregate of plans that offered voluntary enrollment or auto enrollment. (The 2003 data combines plans with voluntary enrollment and auto enrollment because auto enrollment barely existed then.)

By 2013, the participation rate for millennials in auto-enrollment plans jumped to 87%, while participation in voluntary enrollment plans rose to 60%. By comparison, for the 35-49 age group — Generation X — the total 2003 participation rate was 71% vs. a 2013 participation rate of 90% in auto-enrollment plans and 73% in voluntary enrollment plans.

The youngest workers usually have the lowest participation rates, so auto enrollment produced the most profound gains, the report said. Also, half of the plans in the survey introduced auto enrollment for only new hires, who are most likely younger workers with shorter tenures.

Aon Hewitt, Lincolnshire, Ill., found an even more dramatic example of auto enrollment's impact. Among workers age 20 to 29, the participation rate in DC plans without automatic enrollment was 33%; in plans with auto enrollment, the rate was 81%.

“Automatic enrollment is a huge driver” for savings, said Virginia Maguire, director of retirement product and strategy. Auto enrollment leads to greater participation among all age groups, said the survey of 140 client plans with 3.5 million participants that was published in June.

Aon Hewitt also reported the youngest workers are more likely to contribute to a Roth account than other workers — 18% for the 20-29 age group, 14% for the 30-39 age group and lower percentages for older workers. “That's a fairly sophisticated decision,” said Ms. Maguire, referring to the “pay now rather than pay later” tax strategy of younger workers who are in lower tax brackets.

Younger workers also were most likely to invest in “pre-mixed portfolios” — target-date funds and target-risk funds. Aon Hewitt found 85% for the 20-29 age group vs. 74% for the 30-39 age group, and lower percentages for other workers.

The results suggest that younger workers are being auto enrolled into plans in which the qualified default investment alternative is most likely a target-date fund or a target-risk fund, Ms. Maguire said.

Wells Fargo also has noted the allure for young workers of “managed investment products” — target-date funds, target-risk funds and managed accounts. Among record-keeping clients, 84% of millennials have at least part of their retirement account balance in a managed investment product vs. 75.8% for Generation X and 71.6% for all baby boomers, Mr. Ready said.

The rising role of auto enrollment represents good news and not-so-good news for millennials, he said. The good news is that they are investing something and investing early; the not-so-good news is that young workers may keep their annual deferral rate at the traditional 3% unless DC plans promote greater savings rates through more education, automatic escalation and/or a higher default rate, he said.

“Auto enrollment is the most efficient and simplest way to save,” he said. “Simplicity for this generation is pretty important.”

Mr. Ready said internal research shows millennials' opt-out rate from auto enrollment is the same as their peers at 11%. The rate holds steady at default rates of 3%, 4% or 5%, he said. Few clients have auto-enrollment default rates above 6%, he said.

T. Rowe Price Group, Baltimore, has found that millennials are more aware of a corporate match in retirement plans than are baby boomers, based on a nationwide survey, conducted in February and March, totaling 4,308 workers contributing to or eligible for 401(k) plans, as well as retirees holding balances in 401(k) plans or investing in rollover IRAs.

Ninety percent of the youngest workers set their contribution rates to take full advantage or partial advantage of the match vs. 75% of baby boomers and 89% for Generation X. “Plan sponsors should be aware of this attitude,” said Anne Coveney, vice president and senior manager of retirement thought leadership.

T. Rowe Price's research also has dispelled the notion that younger workers aren't focused on their financial future. “Our key finding is that they are financially disciplined,” Ms. Coveney said.

One reason for their heightened diligence is their belief that Social Security won't provide much — if any — safety net in the future. Sixty percent of millennials told T. Rowe Price that they agreed or strongly agreed with the statement: “I expect Social Security to go bankrupt before I retire.” Fifty-one percent of Generation X and 28% of baby boomers expressed the same opinions.

The Transamerica Center's Ms. Collinson agreed that millennials' savings behavior is motivated by their fear of Social Security's future, as well as by their studying the “retirement insecurities” of their parents. “They see what has happened to their parents, so they are saving earlier,” she said.

Ms. Collinson said she was encouraged by a Transamerica survey's finding that 28% of millennialworkers were saving 10% or more annually in their defined contribution plans, just one percentage point below the aggregate for all age groups.

“Although retirement is decades away, it's still at the top of the minds of many millennials,” she said. n