When it comes to saving for retirement, getting started is the biggest hurdle for most investors. For Baby Boomers, access to tax-advantaged retirement savings plans like 401(k) plans often provide the necessary nudge. Today, Millennials and all plan participants are receiving a more assertive push with access to automatic enrollment and target-date investment options.
A recent Vanguard study found that in 2013, two-thirds of millennial plan participants had been subjected to auto enrollment compared with four in ten early Boomers. Further, Millennials were twice as likely to have been using professionally managed allocations, including target-date funds, than the early Boomer cohort in 2013. Half of the millennial generation held a single target-date fund at the end of 2013.
Auto enrollment and target-date funds counterbalance the mistrust of the markets and low risk tolerance level many Millennials have due to the impact of the Great Recession and ongoing market volatility. Notably, Vanguard found the equity allocations for Millennials are higher than expected given their professed intolerance for risk due to the use of target-date funds.
Vanguard also found that between 2003 and 2013 aggregate retirement plan participation rates rose across all demographics. However, plan participation rates rose more dramatically among plans with automatic enrollment.
In 2003, Vanguard found the participation rate was 66% for all plan participants. By 2013, plan participation rose to 72% for plans with voluntary enrollment. But companies with auto enrollment as a plan design feature saw participation rates dramatically rise to 90% for all plan participants. The following chart shows participation rates noted by Vanguard:
To explain the greater increase in participation among Millennials, the study cites young participants typically have the lowest initial participation rates—so the impact of auto enrollment is the largest in this group. Also, half of employers introduced auto enrollment for new hires only and Millennials in the study have a median employment tenure of just two years.
If you are an employer and want to discuss best practices for your company retirement plan, you may want to give us a call and ask for our Retirement Plan Questionnaire.