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Among the various negative results of the coronavirus pandemic – an unfortunately extensive list to be sure – is the harsh reality that retirement accounts suffered setbacks. Not just in terms of performance, either.
The 2020 pandemic-fueled bear market was brief by historical standards and gave way to impressive performance later that year and over the course of 2021. However, the suffering resumed last year as inflation surged thanks to profligate government spending – much of it in the name of pandemic response. That led to substantial equity market losses and one of the worst years on record for broader bond benchmarks.
As a result, retirement accounts, including employer-sponsored plans, endured punishment last year. Advisors might be apt to assume the hard times were particularly punitive for younger workers who only recently started building 401(k) and IRA accounts. Good news: Data suggest younger investors are staying the course and that includes the coveted Gen Z demographic. Not only that, but enrollment rates are trending higher.
Another point to consider is that this is prime avenue for advisors to enhance relationships with younger clients because it appears some need help navigating the laws of small and large numbers. A new survey confirms younger demographics are increasingly devoted to retirement savings and that could spell opportunity for advisors.
Younger Investors Prioritizing Retirement
A new Vanguard survey confirms younger investors want to build retirement account balances and they want that to be a stress-free endeavor.
“Automatic enrollment and the rise of target-date funds are reshaping retirement plan behavior for all generations, but those innovations are having the greatest impact on younger workers—the millennials and Generation Z,” according to Vanguard.
Automatic enrollment in employer-sponsored plans, such as 401(k)’s, isn’t a death knell for advisors. In fact, younger clients’ focus on retirement savings is, regardless of avenue, actually amplifies their desire for financial advice and bespoke solutions.
“Professionally managed allocations (via target-date funds) and advice have significantly improved age-appropriate equity allocations for all generations. In 2006, nearly one-quarter of participants ages 18 to 24 had no equity exposure. In 2021, 97% of automatically enrolled Generation Z participants had an equity allocation between 41% and 99%,” adds Vanguard.
The Vanguard study also indicates that alternative investments could be appropriate for and compelling to younger clients because, not surprisingly, their portfolios are equity-heavy. The median equity allocation in 401(k) plans for millenials and Gen Z is nearly 90%, indicating there’s room for advisors to initiate portfolio diversification conversations.
Still Room for Professional Advice
As noted above, younger workers, including Gen Z, are enthusiastic about automatic enrollment and many embrace target-date funds (TDFs). On the surface, that amounts to set-it-and-forget-it investing.
Advisors need not fret about that because while millennial and Gen Z clients clearly embrace automation and ease of use in employer-sponsored plans, that doesn’t mean their eschewing hands-on approaches when it comes to broader wealth planning.
“But within all generational cohorts, some participants are saving and investing better than others. All participants are individuals, and participants within the various generational cohorts display a broad array of distinct retirement plan saving behaviors. All generational cohorts would benefit from higher saving rates and higher adoption of professionally managed allocations,” concludes Vanguard.
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