What’s (Really) Hindering Millennials’ Retirement Savings?

I’ve learned two things about Millennials over the years: first, that there are few things they find more bothersome than having Boomers tell them what they should be doing – and if there is anything more bothersome than the first, it’s being called “Millennials.”

Setting that aside, I was recently asked to participate in a forum focused on the challenges to retirement savings faced by Millennials. That event, “The Millennial Perspective: An Intergenerational Discussion on Retirement Savings,” was sponsored by Women for a Secure Retirement (WISER), centered on the organization’s iOme Challenge to develop a comprehensive proposal to address the challenges Millennials face in saving for retirement.

Of course, the definition of a Millennial has proven to be surprisingly elusive over time. But those in the forum were willing to accept the definition recently put forth by the Pew Research Center, that it would apply to those born between 1981 and 1996 – which, of course, means that the oldest in that demographic are hardly “kids” (aged 37 in 2018).

Retirement Roadblocks

My panel was tasked with discussing issues regarding financial education, savings and “retirement roadblocks” for this group. And indeed, there are a number of obstacles to savings generally, and retirement saving specifically, for this demographic. Specifically cited were:

Lack of “traditional” employment. This has manifested itself both in higher unemployment rates, and more in so-called 1099 employment in the “gig” economy. This can, of course, create an issue both in the income from which to save, and a…

Lack of access to retirement plan at work. This, of course is a significant hindrance. After all, we know that workers are significantly more likely to save if they have the opportunity to do so via a workplace retirement plan like a 401(k) – 12 times more likely, in fact. But even when they have access to a plan at work, they can still be hindered by a…

Lack of eligibility for a retirement plan at work. While a growing number of plans allow immediate eligibility for employee contributions (58.5%, according to the Plan Sponsor Council of America’s 60th Annual DC Survey), others don’t – and some plans still maintain a year’s wait. And that can be a problem when it comes to…

Job turnover. Millennials are widely regarded as job hoppers, and relative to their elders they may be – not so when their elders were younger. Going back to the end of the second World War, job tenure has been remarkably consistent – so yes, Millennials do change jobs, and while that doesn’t make them unusual, it can make it harder for them to save, particularly when there are…

Other priorities. Let’s face it, we talk about retirement saving as having an “accumulation” phase, but the early stages of most working careers is focused on a broader accumulation strategy – household goods, a car, a house, furniture, etc. And, for many those priorities also include paying down the debt that helped pave the way. Those obligations have, along with shorter job tenures, long been part of the earlier stages of our careers – and still are…certainly when it comes to thinking about…

Retirement. That’s right – retirement. Or more precisely the word itself, which conjures up images of a distant time and an “elder” you that – nifty little aging apps notwithstanding – isn’t something that most Millennials (or, arguably Boomers) have top of mind. In fact, our industry has long bemoaned the complexity of retirement as a savings goal – not only because it’s likely to be as variable as the individuals considering it, but also because it is so hard for an individual to picture, to imagine as a tangible goal. So, yes – we can, with a little effort – put a dollar figure on “retirement” – but juxtaposed next to that much-needed vehicle to get to work, that home with which to house a growing family, that college debt repayment… well, “retirement” is likely to be viewed more as abstract concept than tangible goal.

Perhaps a better way to think of this particular savings goal is to see it as the point at which you have financial resources sufficient to provide the freedom to pursue the avocation of your dreams, to work the hours you want (or don’t), from the location(s) you desire – or even the freedom to quit “working” altogether.

Janis Joplin once told their Boomer parents that “freedom is just another word for nothing left to lose.” But it seems to me that for Millennials, and perhaps for all of us, freedom – financial freedom – is “just” another word for everything to gain.

- Nevin E. Adams, JD
 
See also:

• Things That the ‘Common Wisdom’ About Millennials Gets Wrong
• 6 Things You Should Know About Those Millennial Participants
• So, How Much Should a 35-Year-Old Have Saved?

Things That the ‘Common Wisdom’ About Millennials Gets Wrong

To judge by the headlines, if there’s anybody in more trouble when it comes to retirement planning than Boomers, it’s Millennials. But are they really?

Consider this:

Millennials are saving for retirement – likely earlier, and at higher rates than you did when you were their age.

I’ve seen a number of surveys that suggest that Millennials are, in fact, saving earlier – and saving at higher rates than their Boomer parents. A recent Natixis survey says that on average, Millennials first enrolled in a retirement savings plan at age 23, while Boomers didn’t until 31.

Another – this one by Ramsey Solutions – finds 58% of Millennials are actively saving for retirement, and they began saving at an average age of 23. Consider also that, of the Millennials who are actively saving, 39% set aside up to 9% of their income for retirement — $5,000 of the average annual Millennial household income of $55,200.
This higher and earlier rate of saving exists despite high levels of college debt – which, at least one study claims isn’t having a large impact on their decision to save (though it certainly does affect their spending).

Sure, some of that is plan design – automatic enrollment was a relative rarity when their parents were coming into the workplace. And some of it is that – at least supposedly – their parents didn’t need to save because they had defined benefit pension plans to secure their retirement. But, even for those who were covered by those plans (and many weren’t) – the DB promise was of little value at a time when 10-year cliff vesting and 8-year workplace tenures were the order of the day.

But the reality is that younger workers have long had other, shorter-term financial needs to address. The Boomers certainly did. And despite the challenges of the 2008 financial crisis, a sluggish economic recovery, and the overhang of college debt, Millennials seem to have their head in the right place.

Millennials are likely better invested for their retirement than you are – “then” and now.

Okay, as with saving for retirement, surely some of this is plan design – notably the default investment in target-date funds (TDFs) or some other qualified default investment alternative (QDIA) – and their more recent hire date. While data shows that TDF use varies with participant age and tenure, a recent report by the nonpartisan Employee Benefit Research Institute (EBRI) and the Investment Company Institute, younger participants were more likely to hold TDFs than older participants.

In fact, at year-end 2014, 60% of participants in their 20s held TDFs, compared with 41% of participants in their 60s. Of course, recently hired participants were more likely to hold TDFs than those with more years on the job: At year-end 2014, 59% of participants with two or fewer years of tenure held TDFs, compared with about half of participants with more than 5 to 10 years of tenure, and fewer than 30% of participants with more than 30 years of tenure.

One more positive trend: less investment in company stock. The EBRI/ICI data found that at year-end 2014, only about a quarter (26.9%) of recently hired participants in their 20s who were offered company stock invested in that option. In 1998, more than 6 out of 10 in that age bracket had done so.
They might just be the beneficiaries of good plan design. But that is something that plan fiduciaries might want to keep in mind the next time the concept of reenrollment comes up.

Millennials probably aren’t changing jobs any more often than you did.

Do Millennials change jobs more frequently than their elders? Sure. But they didn’t invent the phenomenon; for a variety of reasons, younger workers have long been more inclined (or able) to pull up stakes and seek new opportunities.

Still, there is a pervasive sense that Millennials are more inclined to change jobs than those in previous generations (setting aside for a moment the reality that as newer hires those decisions might not have been completely within their control). In fact, while it didn’t single out Millennials specifically, a recent report by the Government Accountability Office (GAO) published a paper innocuously titled “Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings.” The report took issue with current workforce dynamics, and challenged the applicability of current vesting and eligibility standards under ERISA as being ill-suited to the current day when the “median length of stay with a private sector employer is currently about four years,” going on to state that ERISA’s rule permitting things like a 6-year vesting policy “may be outdated” (the headlines covering this particular report were much more “strident,” as you might expect).

Really? The data show that median job tenure in the private sector in the United States has hovered around 5 years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years (though that’s attributed to women are staying in their jobs longer; job tenure for men has actually been dropping).

So, if those vesting and eligibility standards were outdated for today’s workforce, then they have been so for – well, as long as ERISA has been in place.

Millennials are thinking about retirement. Probably more than you were at their age.

Millennials have never known a time without a 401(k), nor have they lived during a period when a personal responsibility for saving hasn’t been part and parcel of the education around their benefits package. They’ve been worried about Social Security’s sustainability from the time of their first paycheck (what they probably don’t appreciate is that their parents also worried, and arguably – in the early 1980s – with better reason).

While they certainly have options their parents didn’t, they also have their own set of challenges – some unique, but many unique only in that they are young(er). They have tools and innovative plan design, apps and the aptitude to use them, and in many cases access to professional guidance.

They may not know how much they need to save for retirement, they may not yet feel that they can afford to save for retirement, they may not even know how to save for retirement – but you can bet they know they need to.

And, in more cases than they are genuinely credited, with access to workplace retirement plans, the help of good plan design, and professional retirement planning advice, likely already doing so.

- Nevin E. Adams, JD

See also:

• 6 Things You Should Know About Those Millennial Participants
• How the Class of 2020’s Retirement Plans Will Be Different
• 5 Retirement Myths About Millennials

Use It or “Lose” It

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had become a 401(k)), and a pension accrual of…$0.00.

At the time, I didn’t think much about that.  Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss.

By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation—but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there – for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, national tenure data suggest that my job experience was something of an anomaly.  When you consider that median job tenure in the United States  has hovered in the five-to-seven-year range going back to the early 1950s[i], there have doubtless been many private-sector workers who were, for a time, like me, participants in a traditional defined benefit pension plan, only to see little or nothing come of that participation[ii].

I often hear people say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement.  Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation and more, they could provide far less[iii].

In both cases, it’s not the design that’s at fault—it’s how they are used, both by those who sponsor these programs, as well as those who are covered by them.

Nevin E. Adams, JD 

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[i] See “Employee Tenure Trends, 1983–2012” available here.  

[ii] And a great number of private-sector workers never participated in a defined benefit plan.  See “Pension Plan Participation” available here.  

[iii] A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans”.

Tenure, Tracked

Sooner or later as a parent you’ll be told—as you doubtless you told YOUR parents—that “that’s not the way things are now!” It’s a potent retort to whatever social more is at issue because, whether it involves a choice in dress, curfew, or even resumé preparation, our perspectives are often shaped (and sometimes distorted) by our recollection of the way things were for us at comparable points in time. Or, as we must sometimes admit, “the way things used to be.”

When it comes to things like working careers, there is a widespread assumption that past generations worked for a single employer for all, or most of his/her working years, and then retired with a pension and a gold watch. In contrast, current American workers are believed to change jobs (much) more frequently. In fact, many champion the defined contribution plan design as a better “fit” for today’s workforce, which—certainly in the private sector—is seen as lacking the kind of tenure necessary to accrue sufficient benefits under a traditional pension design.¹As it turns out, the latest data on employee tenure from the January 2012 Supplement to the U.S. Census Bureau’s Current Population Survey (CPS) show that the overall median tenure of workers—the midpoint of wage and salary workers’ length of employment in their current jobs—was slightly higher in 2012, at 5.4 years, compared with 5.0 years in 1983.

In fact, as a recent EBRI Notes article points out, the data on employee tenure (the amount of time an individual has been with his or her current employer) show that those so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years.

Looking inside those long-term numbers, different trends emerge. For example, the median tenure for male wage and salary workers was, in fact, lower in 2012, but the median tenure for female wage and salary workers increased (from 4.2 years in 1983 to 5.4 years in 2012). This long-term increase in the median tenure of female workers more than offsets the decline in the median tenure of male workers, leaving the overall level slightly higher over the long term.

When you focus on trends among older male workers (ages 55–64), the group that experienced the largest change in their median tenure during the period covered by the report, median tenure fell from a level that would not normally be considered career-length—14.7 years in 196—to just 10.7 years in 2012.

Ultimately, when it comes to job tenure trends,² the way things look today is remarkably consistent with “the way it used to be.” However, as is often the case, a closer look at the underlying data highlights that even the things we expect to be different aren’t always different in the ways we expect.

Nevin E. Adams, JD

¹ See also “The Good Old Days,” online here.

² The EBRI report highlights several implications of these trends: the effect on defined benefit accruals (even for workers still covered by those programs), the impact of the lump-sum distributions that often accompany job change, and the implications for social programs and workplace stability. “See Employee Tenure Trends, 1983–2012,” online here.