Age of Anxiety
Stereotypes notwithstanding, millennial workers are actively saving for retirement. But many still struggle with fear and ignorance in managing their 401(k) accounts. Experts -- and millennials themselves -- say employers can help.
By Jack Robinson
Fred Thiele recalls a 22-year-old employee approaching him about a problem with her 401(k) account. She had hit the IRS annual limit for contributions, which currently is $18,000. Though her retirement was at least four decades away, she worried that she still wasn't saving enough.
"I was stunned by the question," says Thiele, who is general manager of global benefits at Microsoft Corp.
Employees at the Redmond, Wash.-based tech giant, where salaries are high and benefits generous, are hardly typical. But Thiele tells the story to illustrate a point that experts make about millennial workers in general: Despite old stereotypes painting them as entitled and disengaged, millennials, on average, are responsible, even diligent, about saving for retirement. Though some millennials struggle with fear and ignorance about managing their 401(k) accounts, these workers are eager for financial education, experts say.
The 17th annual Transamerica Retirement Survey of Workers, published in August 2016, found that millennial workers started saving at a median age of 22 -- earlier than Generation X or baby-boom workers, who began saving at median ages of 28 and 35, respectively. The survey also found millennials are deferring a median of 7 percent of their income -- barely lower than the 8 percent median for all workers surveyed, despite their relatively lower incomes and long retirement horizons.
Moreover, the survey found, millennials outpaced older generations in the growth of their retirement savings from 2007 to 2016 -- by 244 percent over those nine years, compared to 116 percent for Gen X workers and 96 percent for boomers.
The 2017 Plan Wellness Scorecard, an August 2017 study by Bank of America Merrill Lynch, found that 82 percent of millennial employees enrolled in the 401(k) plans it administers made contributions in 2016 -- well ahead of the rate for Gen X workers (77 percent) and boomers (75 percent).
For all their willingness to save, millennials certainly face financial challenges -- including, for some, relatively low incomes and high student-loan balances. Fear and lack of knowledge about investing also may be barriers, experts and employers say.
For many young workers, getting started is the hard part. Their household budgets usually are slim, and investing for the far-off future is a difficult commitment to make -- especially for young workers unfamiliar with the nuts and bolts of investing, such as understanding the difference between mutual funds and ETFs or evaluating investment fees and rates of return.
Kat Bulger sees the issue from two perspectives. As the resident HR professional in a national home healthcare company's Central California office, part of her job is encouraging the organization's 125 employees to participate in the company 401(k) plan. And at 33, she's squarely in the millennial generation herself.
Bulger says she was excited to start saving after working at smaller companies that lacked retirement plans. "As soon as I started at a company with a 401(k), I signed up as soon as I could," she says.
But Bulger finds that some other millennial workers balk at enrolling out of concern about taking home a smaller paycheck. "For younger employees, [the deduction] seems really large," she says.
Bulger has had some success getting younger workers to participate in their 401(k) plans by emphasizing how small the deduction often is. These workers may make so little that "typically, it's only $20" withheld each pay period, she says. Once they realize it won't affect their daily life, they just leave it and continue to contribute a set percentage of their pay, she says.
Employers can help millennials get over the initial hurdle by adopting an auto-enrollment feature in their 401(k) plans, experts say.
With student loans burdening many millennials, "there's only so many dollars to go around," says Martha Hayward, a vice president for marketing at Boston-based Fidelity Investments, a major provider of employer-sponsored 401(k) plans. To get young workers saving early, she says, "auto-enrollment is crucial."
A new report by investment giant Vanguard, How America Saves 2017, found that the average participation rate in its 401(k) plans with auto enrollment was 90 percent, compared to an average of 81 percent for all plans.
When it comes to designing retirement plans that suit millennial employees, auto enrollment is just the beginning. Other "autopilot" plan features that employers can choose to simplify retirement saving for employees are rapidly gaining popularity. These include automatic contribution increases and the inclusion of "target date" mutual funds that rebalance their investment mixes over time to better fit the likely risk tolerance of account holders as they age.
By 2016, 90 percent of the 401(k) plans that Vanguard administers offered target-date funds and 72 percent of all participants invested in them, according to the firm's 2017 report. In addition, Vanguard reports that 45 percent of the plans it administers have adopted automatic enrollment, up from 27 percent in 2010.
Betterment is among a handful of investment firms that have taken the autopilot idea a step or two further, offering "robo-investing" services to retirement savers. The New York-based company is courting millennials by offering a combination of automated and human advice. In July, the company announced it also will allow account holders to ask questions of a human financial adviser through a secure messaging tool. (Unlike many other robo-advisors, it also offers 401(k) plans to employers.)
The average age of Betterment's customers is 37, says Nick Holeman, a certified financial planner with the company. Holeman believes employers should look for "subtle nudges" to help steer millennials on to a safe path to retirement. Enabling auto-enrollment and setting appropriate default choices in their plans goes a long way in helping them achieve this objective, he says.
Closing the Knowledge Gap
Bulger says a lack of financial knowledge amplifies the fear many of her millennial workers have about retirement saving. "A lot of them don't have a grasp" of financial basics like the power of compounding, Bulger says. "They don't know how the stock market works."
A 2015 study by George Washington University's Global Financial Literacy Excellence Center and PwC found that many millennials know little about money and investing. Only 24 percent of those surveyed demonstrated basic financial knowledge, according to a report on the findings.
The Transamerica survey, meanwhile, suggests millennial workers would like to see their employers come to their aid as far as financial education is concerned: Of those surveyed, 75 percent agreed they "would like to receive more information and advice from my company on how to achieve my retirement goals." Only 55 percent of baby boomers said the same.
One way to keep millennials engaged in planning and saving for retirement is reframing the goal to make it more compelling for a young worker, says Shane Bartling, a senior consultant with Willis Towers Watson in the San Francisco Bay Area. Being young, millennials naturally may see retirement as more theoretical than real, he notes.
"It comes down to making it more tangible," Bartling says. He recommends that employers make the point that saving for retirement also can be seen as saving to become financially independent, free to pursue hobbies or other nonprofessional passions. "It's really just rebranding retirement," he explains. "It's a much more compelling value proposition."
This approach has successfully improved millennial retirement-plan engagement, he says.
Further evidence that millennials are more motivated by the prospect of financial freedom than by simply ceasing to work for a paycheck can be found in Merrill Edge Report, released in May. The study revealed that 63 percent of millennials agreed with the statement, "I am saving to live my desired lifestyle." Only 37 percent agreed with the statement, "I am saving to leave the workforce."
Lack of knowledge isn't the only reason millennials are leery about investing. Many experts link it to a formative experience common among this demographic: As teenagers or young adults from 2007 to 2009, they watched their parents' generation struggle financially, or even fail, during the Great Recession. Some experts say that has shaped how many of them think about money.
"The 2008 recession left an indelible mark on an entire generation," Rosell says. While boomers could trust that living below their means would be enough to build a secure financial future, "that's not necessarily true today," particularly with high levels of student debt among millennials, says Rosell, whose latest book, Keep Climbing: A Millennial's Guide to Financial Planning, aims to engage millennials in financial planning by comparing saving to scaling a mountain.
Holeman agrees. People who lived through the financial crash are "naturally more cautious," he says, adding that "many are still affected by it eight years later."
Among those still affected is Bulger, the millennial HR practitioner in California. "Just as we were becoming adults, that's when it all hit the fan," Bulger says. As a result, "I'm a little paranoid" about finances, she says.
Zoë Fox has a similar attitude. Now a 29-year-old realtor in Philadelphia, Fox remembers a college friend who had to drop out after her parents suffered a foreclosure during the financial crisis. Does that memory affect her philosophy about retirement savings? "Absolutely -- I'm super conservative about money," she says.
Modifying the Match
Employers have another simple, yet powerful method that can help encourage cash-strapped millennials, or employees of any generation, to overcome their investment fears and participate in the 401(k) plan: increase the employer match.
That's what Microsoft did last year, when it began matching half of each participant's contribution, up from half of an employee's first 6 percent of pay deferred. Now, about 90 percent of Microsoft workers participate in the company's 401(k) plan.
Not every company has the cash to contribute as much as Microsoft does to employee retirement savings. Other effective strategies, however, are well within the reach of any organization.
How an employer structures its match also can make a difference, say the authors of the Transamerica report. They recommend that employers encourage employees to save more by matching half of the first 6 percent a worker contributes, for example, rather than the first 3 percent.
Another relatively easy approach, Thiele says, is to tailor communications to different segments of the workforce -- a step that could be particularly effective with millennial workers who have little experience with saving for retirement.
At Microsoft, employees are allocated into 13 "buckets" based on factors such as how -- and how much -- they save, with each "bucket" getting its own stream of communication. That way, millennials who may not be as engaged in their 401(k)s as other demographic groups are able to receive messages that are more tailored to their situation and needs.
Thiele's advice: "If you don't have resources to increase your match, get rid of your old, tired communications campaign."
It's also true that millennials are generally more comfortable with technology than most older workers. Experts, therefore, recommend choosing a plan administrator that offers participants mobile access to their accounts.
The Transamerica survey found 80 percent of millennial workers preferred 401(k) providers that offer mobile access.
At Vanguard, mobile devices now represent 22 percent of all client contacts (compared to 17 percent through telephone calls to a Vanguard representative), as millennials become the workforce's largest generation. The company did not break out figures for mobile access in previous annual reports.
"Millennials are different," says Zane Dalal, executive vice president of Benefit Program Administration, a Los Angeles-based company that manages benefits programs for employers and trade unions. "They're used to doing everything with two thumbs" on a smartphone, he says.
Experts agree that employers are going to need to do a better job recognizing and addressing those differences if they hope to successfully engage millennials in saving for the future.