Do Millennials Really Have it Tough in 401k Saving?

Parents do it. Grandparents do it. It’s a tradition. Every generation shares its history to educate younger generations and impress upon them the effortlessness of modern life.

Some older generations walked 10 miles uphill (both ways) in snowstorms to attend school through eighth grade. Other generations didn’t have personal phones, much less smart ones. They were tethered to the kitchen by tangled eight-foot cords, and texting and social media didn’t exist.

Millennials (and Gen Xers) may offer stories about the difficulties of saving for retirement. Some believe it’s because Millennials are job-hopping slackers who value happiness over hard work, and don’t recognize the need to plan. It’s a stereotype that’s about as helpful as any other—which means not very.

It does, however, explain why so few Millennials embrace the generational moniker and so many prefer to define the generation differently. They’re right to do so. Achieving retirement security is likely to be far more difficult for younger Americans than it has been for older generations. For instance:

• Younger workers tend to have lower wages and fewer fringe benefits than their elders, which can make saving more challenging. A 2017 research report found Millennials earn about 20-percent less than Baby Boomers did at the same age. In part, this is due to younger workers joining the workforce during a difficult economic period. However, it has the potential to affect lifetime earnings since the highest income growth often is realized during the first decade of work.

Notably, Millennials’ income declined across education groups. Young workers with a college degree (and the debt taken on to get it) earn the same as workers with no college degree earned in 1989.

• Gen Xers and Millennials may receive reduced Social Security benefits, so they’ll need to save more to live comfortably in retirement. In 2037, not long after Gen X begins to retire, the Social Security trust fund reserves are expected to be, The Social Security Administration reports,

“At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future. The Social Security Board of Trustees projects that changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.”

• Gen Xers and Millennials are less likely to have opportunities to participate in defined benefit pension plans. During the past two decades, many large employers have closed or frozen traditional defined benefit plans and transitioned plan participants to defined contribution or hybrid plan alternatives. Towers Watson reported, “In 2017, only 16% of Fortune 500 companies offered a DB plan (traditional or hybrid) to new hires, down from 59% among the same employers back in 1998.”

While defined contribution plans don’t have the funding headaches that often accompanied DB plans, the retirement security provided by 401(k) plans depends upon participants’ participation and savings rates, as well as their investment choices and longevity estimates.

• Millennials and Gen Xers have joined the Sandwich generation, which exacerbates already significant financial challenges. Many young workers are providing financial assistance to parents and/or in-laws, as well as supporting offspring. This may negatively affect their ability to pursue other financial goals, including paying off student loan debt and buying homes.

A 2017 PwC report observed that the majority of Gen Xers (59 percent) and Millennials (57 percent) are stressed about their financial circumstances. In fact, finances were number one on the list of top stressors.

Employers should consider the challenges younger workers are encountering from the perspective of financial wellness. Many companies have found improving employees’ financial wellness has myriad of benefits that include better health, reduced absenteeism, lower turnover rates and higher employee satisfaction. All of these can help build a company’s reputation as a desirable workplace. By making it easier for younger workers to save for retirement, companies may be able to significantly reduce employees’ financial stress.

Two issues have affected younger Americans’ participation in workplace retirement plans and accumulation of savings: access and liquidity. In general, younger Americans have:

Limited access to workplace retirement plans

Two-thirds of Millennials work for employers that sponsor workplace retirement plans. Yet, just one-third of them participate in those plans. The reason has little to do with procrastination and a lot to do with access. Forty-five percent of working Millennials are not eligible to participate in their employer-sponsored plans.

The National Institute for Retirement Security suggested the problem could be resolved by lowering the 1,000-hour year of service requirement under the Employee Retirement Income Security Act (ERISA). This would make it possible for part-time workers to participate and, since a quarter of Millennials workers have part-time status, it would make retirement plans more accessible and could improve Millennials’ retirement readiness.

One potential objection is that making plans accessible to part-time workers could increase the complexity of plan administration and result in a higher number of accounts left behind. One solution may be a Safe Harbor IRAs provision. This allows plan sponsors to automatically rollover smaller accounts that were left behind by former employees into IRAs. It’s a proven method for keeping participant numbers low. In addition, automatic rollovers can reduce plan costs and administration, and remove fiduciary responsibility once accounts have been transferred to IRAs.

A need for more liquid retirement savings alternatives

Early distributions from defined contribution plans often are accompanied by penalty taxes, to say nothing of regular income taxes. Yet, in 2017, nearly one-third of all participants had withdrawn money from their retirement accounts, according to PwC.

When you break down the numbers, Millennials (35 percent) and Gen Xers (32 percent) are far more likely to take early distributions than Baby Boomers (20 percent). The percentages jumped higher when plan participants were asked whether they will need to take distributions from retirement plan accounts for non-retirement expenses in the future.

It’s possible that providing plan participants with access to a more liquid savings option within a workplace plan could encourage younger workers to save more. One possibility is a payroll deduction sidecar IRA (a.k.a. a deemed IRA). These qualified plan accounts were introduced in the same legislation that created Roth plan accounts, and they include both Traditional and Roth IRAs. The accounts are made available to participants under the employers’ tax-qualified retirement plan, but they are subject to IRA tax rules and dollar limits rather than qualified-plan tax rules and dollar limits.  Consequently, plan participants may be able to access Roth sidecar IRA contributions without taxes or penalties to address immediate financial needs.

Helping employees become better prepared for retirement has never been more challenging, but there are a variety of tools that can help. Automatic rollover IRAs and sidecar IRAs are tools that plan sponsors should consider adding to their plans.

Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.