Generation Y (Gen Y) is the youngest generation in the workforce (born approximately between 1980 and 1995). While these workers are decades from retirement, the choices they make today will impact their eventual retirement. Unlike their parents and grandparents who may have enjoyed pensions, Gen Y will be the first generation to have access to a defined contribution (DC) plan throughout their working lives, and will be responsible to fund their retirement solely through their savings.
How are Gen Y consumers balancing the various demands on their resources? Are they currently saving or thinking about retirement? And how can plan sponsors and the financial services industry encourage them to save more for retirement?
Today’s tough economic times create hurdles for Gen Y as they start their careers – and these challenges could impact their ability to save for retirement. Despite relatively high levels of education, Gen Y workers have been hit hard by the recent recession. While Gen Y consumers should be prime candidates to save for retirement, they are being sidetracked by other spending and saving demands. Based on findings in LIMRA’s Sowing the Seeds for Retirement: Gen X and Gen Y Markets, only one in three Gen Y consumers choose retirement as an important reason for saving. For Gen Y households with incomes of $100,000 or more, only 46 percent selected retirement as an important reason to save.
There are several ways younger workers can save for retirement, including through their employer and on their own, as well as through taxable, tax-deferred or tax-free accounts. At present, the most popular way for Americans to save is through the workplace – and the first step to saving is access. LIMRA found that 62 percent of Gen Y workers have access to a DC plan through their current employer, and nearly 69 percent of that group currently contributes to the plan.
Research shows that workplace retirement saving efforts are aided by incentives, with the most important incentive being matching contributions offered by employers. Fortunately, 78 percent of Gen Y consumers work for an employer that offers matching contributions.
On average, Gen Y workers have accumulated slightly less than $26,000 over the course of four years through contributing to their current employer’s DC plan. LIMRA’s study found Gen Y’s median deferral rate is about six percent, with one in five Gen Y workers contributing three percent or less to their current employer’s DC plan.
Even if a retirement savings plan is not available at their workplace, working Americans can save for retirement through Individual Retirement Accounts (IRAs). LIMRA found that 37 percent of Gen Y consumers own an IRA. Of those, two-thirds have contributed to their account in the past 12 months, and one-third have rolled money from an employer-sponsored plan into an IRA. Among non-IRA owners, one quarter of Gen Y consumers are considering contributing a portion of their income to an IRA in the next 12 months.
Gen Y consumers need to save more to be on track for a secure retirement; however, persuading them to save more is easier said than done. Plan designs using automatic features, as well as adjustments to matching formulas, are examples of strategies that can increase enrollment and savings rates over time. Companies should consider which are the most effective education tools, as well as the preferred modes of delivery to reach younger consumers.
Another critical element is ensuring the money they save remains set aside for retirement. Plan cash-outs or withdrawals can have a significant impact on retirement income adequacy. Companies should review their counseling procedure for actions that might compromise plan participants’ future retirement security. Steps such as providing plan participants with estimates on the long-term implications of taking money out of plans might help reduce cash-outs and withdrawals.
Although Gen Y’s relatively young life stage means that they have not yet accumulated many assets and currently have limited income, they represent the future of the retirement industry. It is vital for companies to remind them why saving for retirement must be a top priority, and how saving even at modest levels at the start of their career could help them secure their future retirement.