Younger Workers Are Reaping Benefits of 401k Plan Improvements

Millennials are outpacing older workers in saving for retirement thanks to safe harbor for auto features

401k, retirement, auto features, EmpowerThey have reasons to smile.

The world is changing so rapidly that it can be easy to fall behind. Fortunately, for younger 401k savers, that’s far from the case when it comes to putting aside money for retirement.

Instead, Millennials are coming out ahead. More workers belonging to the younger generation are enrolled in a retirement plan and on-track to fully replace their income than workers in older generations.

According to a new survey from Empower Institute, 24 percent of Millennials are enrolled in a formal retirement plan (such as a 401k, 457b or 403b). But only 19 percent of Gen Xers and 17 percent of Baby Boomers currently participate.

Among workers with a plan, Millennials are on track to replace three-quarters of their income in retirement. Gen Xers, however, are only on track to replace 61 percent. Baby Boomers are even further behind with a 58 percent replacement rate.

But the younger generations’ “better saving habits” come with an asterisk. This behavior is thanks (at the very least, in part) to the Pension Protection Act of 2006, which modernized the structure of retirement plans by encouraging the incorporation of automatic features and incentivizing employer match (among other things).

“New features such as auto enrollment and auto escalation have come a long way in making access to retirement savings programs easier for employees and in shaking off some of the concerns of the past with earlier DC plan designs,” Edmund F. Murphy III, president of Empower Retirement, said in a statement. “Millennials are the first generation in the workforce to fully benefit from changes in the law made in 2006.”

Data reflect as much. More than two in five (41 percent) younger workers participate in a DC plan with auto-enrollment, compared to 38 percent of Generation X workers and 33 percent of Baby Boomers.

Across all generations, American workers are set to replace, on average, 64 percent of their income in retirement. But when a plan includes auto-enrollment, this figure is 11 points higher, Murphy noted.

Further, the Empower study found:

  • Fewer Millennials than Gen Xers and Baby Boomers believe they will have to work at least part time in retirement. Forty-eight percent of boomers believe they will need to work at least part time in retirement, compared to 44 percent Gen Xers and 40 percent Millennials.
  • Millennials looking out to the future are counting less on Social Security as their retirement income than older generations. Fifty-nine percent of Millennials expect Social Security to be a source of income in retirement, compared to 88 percent of boomers and 73 percent of Gen Xers.
  • 61 percent of Millennials expect defined contribution plans, such as 401ks, to be a source of income in retirement, compared to 55 percent of Gen Xers and 47 percent boomers.

“Millennials who have had access to defined contribution plans are taking charge of their retirement planning by setting up a formal plan and seeking professional advice,” Murphy concluded. “Those are two strategies that are likely to lead to better retirement outcomes.”

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