More workers than ever are saving more toward their retirement and Millennials are quickly catching up to older generations when it comes to contribution and participation rates, according to new research released Feb. 19 by Principal Financial Group.
The Driving Plan Health report conducted by Wells Fargo Institutional Retirement and Trust, which was acquired by Principal in 2019, indicates all three key retirement plan health measures—participation, contributions and diversification—show significant gains over the last five years. Millennial workers in particular appear to be quickly catching up to Boomers when it comes to contribution and participation rates.
“Seeing such significant growth among these critical plan health measures tells us more people depend on defined contribution plans to save for their retirement,” said Renee Schaaf, president of retirement and income solutions at Principal. “With Millennials looking to replace more of their retirement income with their DC plan accounts, we have a tremendous opportunity and obligation to help them save enough so they can have enough in retirement.”
Report highlights
- Employer match remains a significant driver of participation, especially among older workers. Total employer contribution is about 20% more strongly associated with participation rates among pre-retirees than overall participant population.
- Automatic enrollment with re-enrollment or automatic sweep feature is a popular plan design for employees. In fact, 77% of employees express a positive or neutral reaction to re-enrollment of those who have opted out of participating in the past.
- Innovative digital plan design tools encourage participants to plan and save more. 35% of respondents say they interacted with an online calculator to explore the effect of making changes. Of those, 46% changed their deferral rate during that same online session.
- Catch-up contributions remain underutilized. While 98% of plans allow catch-up contributions, only 7% of pre-retirees made catch-up contributions—and only 3% hit the maximum IRS contribution indexed limit for 2019. The study says a participant who saves the maximum $6,000 every year in catch-up contributions starting at age 50 could have an extra $150,000 in retirement savings at age 65 (assuming an annual 7% rate or return).
- Boomers are more active in workplace retirement programs. The report found 47% of Boomers contribute to a retirement savings account vs. 37% of Gen X and 30% of Millennials.
- Over the last five years, participation in a DC plan has grown at the fastest rate vs. other plan health measures. Participation in a defined contribution plan has increased 12% from 2013 with 65% of individuals taking part in a workplace 401k.
- Millennials are more interested in diversifying retirement investments. More Millennial workers choose diversified retirement investment options at 83% vs. 78% of Boomer workers. Of those diversified, 63% of Millennials have 100% of their funds in a diversified investment solution compared to 45% of Boomers. Diversified investment solutions are defined as allocations toward an all in one choice like target date funds (TDFs), managed accounts or model portfolios, or account balance in at least two equity and one fixed income asset class.
Millennials on pace to out-save previous generations
While pre-retirees save more now, Millennial workers in the study significantly outpace their predecessors when looking at retirement income replacement projections. It is estimated pre-retirees will replace 47% of their income on average, while Millennials will be positioned to replace 86% of their income.
Factors for this include:
- Many Millennials are gaining access to defined contribution plans earlier in their working life than those over 50 years of age, identified in the study as “pre-retirees.”
- Nearly a third of pre-retirees aren’t participating in their 401k plans, and of those that do, less than half save at least 10% of their income, including employer match, which is estimated to replace less than half of their income in retirement.
- Those nearing retirement may also be banking on other primary retirement income sources.
- 19% of pre-retirees will depend on a defined benefit plan and 38% on Social Security as their primary source of income in retirement.
- Conversely, 46% Millennials expect their defined contribution plan to serve as their main source of income in retirement, compared to only 25% of Boomers.
Why aren’t retirees using their 401k?
The research found that 81% of workers with access to a 401k plan say they’d prefer to stay in their plan if they could make withdrawals during retirement. But only 4% of retirees have set up periodic withdrawals from their 401k account. What causes the drastic difference?
For some plan sponsors, the extra expense and administration overhead involved in handling minimum required distributions (RMDs) become a deterrent. Even if a plan doesn’t force terminated participants out after a certain age, it may not have features needed to create a retirement income stream from the plan. The report takes a closer look at investment offerings, distribution options and plan usage and how they play distinctive roles.
To overcome the gap in those workers wanting to use their 401k plans for retirement and those that really do, change needs to happen. Plan design provides the foundation for improvements, supported by educational materials in the form of participant communications and online tools and resources.
Plan sponsors may want to consider additional education or financial wellness programs geared around retirement income planning. Consider information on topics like:
- How to create a retirement budget and distribution plan
- Managing investments in retirement
- Strategies for utilizing Social Security and Medicare
- Consolidating retirement savings from a career that spans multiple employers
This year, the report expanded its scope to look at how to help participants succeed not just in getting to retirement but creating an income stream in retirement. The 2019 Driving Plan Health report examines 4 million eligible participants in approximately 1,900 defined contribution plans with services by Wells Fargo Institutional Retirement and Trust defined contribution plans, as well as terminated participants who retained a balance in those plans.
“Overall, we’re encouraged by the positive trends uncovered in this year’s report,” Schaaf said. “Increases in participation and contribution rates combined with the passage of the SECURE Act should help drive momentum over the next five years.”