Almost every day it seems there is a new headline or think piece that stereotypes the Millennial generation as unengaged and misinformed about their finances. While it’s true that many Millennials are saddled with debt from student loans and are often struggling to get ahead, it is unfair to paint an entire generation with the same brush.
When it comes to investing in their 401ks, research shows that Millennials are actually more engaged than older generations[i] and, as a result, are beginning to demand more from their companies’ benefits offerings.
Instead of writing Millennials off as entitled, it’s important to consider how plan design can evolve to meet their needs. It is often assumed that when setting up a 401k plan, new workers just want to “set it and forget it”; however, the personalized nature of managed accounts may be especially appealing to tech-savvy Millennials. Personalized advice may prove not only highly effective and low-cost for younger employees, but also valued and wanted.
In fact, a recent Schwab study revealed that 80 percent of Millennials would like personalized investment advice for their 401k, and a significant majority think their financial situation warrants financial advice, regardless of how much they have saved.[ii]
Personalization is the new norm
Technology and the availability of data have changed the way consumers think about products and services. Personalization has become a part of life, and individuals are making decisions based on what makes sense to them and their lifestyle. The same is true with investing.
Consider this hypothetical scenario: Two 30-year-olds work at a major retail chain store. One is a pharmacist and the other is a junior manager. One is married and has children, while one is single and has no children. Both of these employees participate in the same company 401k plan, but their financial situations and needs are obviously quite different.
Rather than opting for a portfolio based only on their age, they may find that a data-driven strategy created with the help of a financial professional is even more useful, since it takes multiple factors about each individual into account. These data points include everything from other sources of retirement income to current salary and savings rate to marital status, gender, state of residence and more.
A little help goes a long way
The benefits of advice are apparent for any investor but can make a lot of sense in the early-career phase when the 401k participant is trying to get on the right financial path. Many assume that because younger employees may not have investments or other financial assets beyond their 401ks, there is little value to be gained from professional help. In reality, because the quality and amount of participant data has improved over time, advice providers have the ability to know a lot about people’s unique situations and thus can be more refined in making recommendations than they could in the past.
Additionally, we have seen that those who have opted for managed account services have greater engagement with their retirement plan. This often leads to a higher savings rate that can potentially pay a huge dividend as they get older.
A study by Morningstar revealed that participants in managed accounts contribute 0.5 percent per year more than those in target date funds and earn 0.24 percent per year more after fees, on average.[iii] On top of that, a Schwab survey found that 85 percent of Millennials would feel highly confident in their investment decisions with the added help of a financial professional.ii
For a younger employee, the personalization and increased confidence that are gained from having someone manage their 401k for them can be very beneficial and can certainly be worth the investment.
Employers are expected to play a larger role
Forty years ago, the social contract between the average American and their employer meant working at one place for a long time until they earned a pension. While Millennials may not expect pensions, they still desire that their employer take a broader role in their retirement preparation and financial well-being.[iv]
We have seen that when it comes to investing in a 401k, many Millennials use the tools and resources provided to take positive steps. For example, compared to other generations, data show that Millennials are more likely to rebalance their portfolio, more likely to accept advice and more likely to increase their contribution rates.i
As workplace benefit plans have evolved, employers can now provide additional offerings like managed accounts and financial wellness programs that allow their employees to take ownership of their finances and control of their future. It won’t be long before Millennials make up the majority of the workforce, and employers who best meet their needs will have an advantage when it comes to recruitment and retention.
Nathan Voris is managing director, Business Strategy, Schwab Retirement Plan Services.
[i] The Modern Wealth Index, developed in partnership with Koski Research and the Schwab Center for Financial Research, is based on Schwab’s Investing Principles and composed of 60 financial behaviors and attitudes – each assigned a varying amount of points depending on their importance. The Index broadly assesses Americans across four factors: 1) goal setting and financial planning, 2) saving and investing, 3) staying on track, and 4) confidence in reaching financial goals. Based on the total number of points received, respondents were indexed on a 1-100 scale for each of the four factors and an overall score.
The online survey was conducted by Koski Research from April 12 to April 20, 2017, among 1,000 Americans aged 21 to 75. Quotas were set so that the sample is as demographically representative as possible. The margin of error for the total survey sample is three percentage points.
[ii] 2017 401k Participant Survey, August 2017, conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.
[iii] The Impact of Expert Guidance on Participant Savings and Investment Behaviors, 2015 study, Morningstar, June 2015.
[iv] Employee Financial Wellness Survey, 2016 results, PwC, April 2016.