Trending
Long gone are the days in which private sector workers could count on a defined benefit pension to support them in retirement. It’s a different ball game in government, but corporations simply aren’t incentivized to offer defined benefit pensions as a perk anymore.
If anything, companies are incentivized to appease shareholders by keeping such long-term liabilities at bay and focus on 401(k)’s and related retirement plans. 401(k) and comparable employer-sponsored retirement plans have essentially been the lay of the private sector retirement land for four decades now and while that’s been a drag for some generations, data indicate younger workers are keenly aware that the 401(k) is as good as it’s going to get in terms of employer retirement assistance and they’re capitalizing on that option.
Gen Z’s and millennials’ proactive attitudes toward retirement planning are beneficial on a number of fronts, including the point that many folks in these younger demographics are signaling a willingness to work with advisors to improve their retirement pictures. Importantly, that desire increases as they work longer and increase the dollars they allocate to retirement plans and the like.
Advisors should heed the details in Vanguard’s How America Saves 2024 report, which tracks what more than five million workers that use Vanguard retirement plans, including Gen Zers and millennials, are doing with their retirement dollars.
Access, Automation Matter
Companies aren’t required to offer retirement plans, but they’re motivated to do so because with 401(k)’s, the employer enjoys some tax perks. Additionally, the fight for talent in some industries is so intense that employers need to offer attractive benefits packages.
That takes care of the access part of the equation, but without automation or automatic enrollment, many workers might forget to take advantage of the 401(K). As Vanguard points out, just 10% of employers in 2006 offered autoenrollment on 401(k)’s. That number was 59% as of last year.
“Nearly three-quarters of larger plans (those with over 1,000 participants) have a feature that automatically enrolls participants,” according to Vanguard. “About three in four participants in these larger plans are enrolled in plans with autopilot designs (although autoenrollment itself may only apply to newly eligible participants). Among younger workers (age 25–34), participation rates are up 12% over the past 10 years.”
Autoenrollment is valuable for anyone, regardless of age, but it’s arguably even more advantageous for younger workers that may be tempted skip on retirement planning and use the cash that would have otherwise gone into the 401(k) for more frivolous purposes.
“Autopilot” is good for another reason. It’s helping workers save more. Vanguard notes that workers with access to its retirement plans are saving an average of 11.7% for retirement through those plans. That’s below the recommended 12% to 15%, but still an all-time high.
Younger Workers Embracing Professional Advice
While target-date funds remain popular, it appears as though many young workers realized that those products likely feature too much fixed income exposure for them and their elevated (and appropriate) levels of risk appetite.
“The number of plans offering target-date funds—which determine portfolio allocations based on an expected retirement date and turn more conservative as a participant approaches retirement age—has steadily increased in recent decades,” adds Vanguard. “At the same time, more companies are providing target-date funds as the qualified default investment alternative for automatic enrollment programs.”
While that’s an endorsement of target-date funds, there’s also evidence suggesting more younger workers are tapping advisors to help them with asset allocation within employer-sponsored plans.
Related: A Familiar, Cost-Effective Way to Access Growth Stocks