Millennials have seen two 100-year events before turning 40. They came of age during the 2008 global financial crisis, and today—during some of their prime earning years—they’re facing down COVID-19. In between, they saw what may turn out to be yet another once-in-a-lifetime event — the longest sustained bull cycle in modern market history.
Given what we know about how past experience can impact future behavior, what might we expect from this “Black Swan Generation?”
Much has been written about Millennials’ aversion to risk, but deeper analysis of current behaviors suggests the story is considerably more nuanced than that. Perhaps even more important is what Millennials may do as they age and get closer to the years leading up to retirement, particularly around sensitive periods and events.
As the tenets of behavioral finance are increasingly being adopted and applied, it’s important to recognize what Millennials have witnessed during their formative investing years. That experience also has bearing on the retirement solutions they choose, such as Target Date Funds (TDFs).
What current behaviors tell us
Let’s start with what we know. Millennials’ current behaviors tell us quite a bit about their preferences and inclinations, and it’s not as straightforward as some might suggest. Consider the following:
- There’s quite a bit under their mattresses – A 2018 study found that Millennials are the only generation to say that cash is their favorite long-term investment.[1] This seems to support the case that in the aftermath of the Great Recession, Millennials have adopted a highly conservative approach to saving and investing. That might be true if you were only looking under their mattresses. Look further and the story gets more complicated.
- They’re NOT averse to risk – Millennials’ high cash holdings aren’t borne purely out of caution. They’re taking risks elsewhere. For example, cryptocurrencies are three times more popular as a long-term investment vehicle among Millennials as compared to any other generation.[2]
Natallia Yazhova - When they buy stocks, it’s not exactly safe havens they’re seeking – When it comes to equities, Millennials tend to buy companies they know. That can make their risk highly concentrated, and largely in companies that can be volatile. Case in point: Schwab data shows the No.1 equity holding among self-directed Millennial 401k participants is Tesla, with an average 11% portfolio allocation. That compares to an allocation of just over 6% for all self-directed 401k participants.[3]
- They’ve got good instincts – Millennials are saving early and saving more. For example, our research shows that on average they begin contributing to their 401ks at age 25, as compared to Gen X at 29 and Boomers at 35. They’re also the generation most likely to have increased their 401k contribution rates in the current environment, followed by Gen X and then Boomers.
- They’re disciplined with their retirement savings – Millennials have a 61.5% adoption rate for TDFs, second only to Gen Z at 65%.[4] The funds have helped to keep Millennials’ asset allocation on track with their retirement savings.
What we can expect about future behaviors …and why that matters for TDFs
To a degree, Millennials’ current behaviors look like a profile in contradiction – in some places they’re arguably overly conservative and in others they’re taking excessive risk. But we all have different personalities for different parts of our lives—just look at all the memes out there comparing how we present ourselves on LinkedIn vs Facebook vs Instagram.
Recognizing that, the money Millennials put toward retirement—largely in TDFs—plays an enormous role, acting somewhat as a counterbalance between the strategies on either side of the risk spectrum. In turn, that adds gravity to the TDF selection process, and that’s where experience and behavior come in.
Many TDF buying decisions are made simply by looking at the year in the name of the fund rather than looking at what’s under the hood. But glide paths vary greatly, and while it may not be immediately apparent to plan sponsors and consultants when selecting funds, the discrepancies between TDFs have significant ramifications.
Given what we know about Millennials, there is a strong case to be made for a glide path that delivers forced discipline in the near term to get appropriate equity exposures now, combined with a more conservative mix later, in the years right before retirement when the potential for panic selling could run high.
Imagine if the next Black Swan event occurs when Millennials are in that critical period within five years of retirement. Given what they’ve seen before, it’s not a stretch to imagine they could veer from the discipline they’ve showed in that one crucial area of their financial planning lives: their retirement savings. If so, it could come at the worst possible time.
The takeaway here is to see the participants in a retirement plan as people and provide them with options that factor in their human experience. Also, communicate with them in a way that will resonate. We know Millennials tend to be more socially driven and thus rotate towards cognitive biases. A communications strategy that is data-oriented, leveraging channels such as short videos, can be an effective way to reach them.
It’s important to ask TDF providers if they can help analyze the fit of a plan’s demographics with the fit of a TDF’s glide path. As part of that, remember: Millennials are the Black Swan Generation.
Omar Aguilar, Senior Vice President and Chief Investment Officer, Passive Equity and Multi-Asset Strategies, Charles Schwab Investment Management, Inc.
Natallia Yazhova, Director of Multi-Asset Solutions, Charles Schwab Investment Management, Inc.
[3] Schwab Q3 2020 SDBA Indicators Report
[4] Schwab Retirement Plan Services, Inc. and Charles Schwab Investment Management, Inc. as of November 30, 2018.