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

The "Hassle" Factor

Much is made these days of the application of behavioral finance and the implications for plan design, as well as the role of choice architecture in helping workers make “better” (if not more informed) benefit decisions.  Valuable as these insights have been, I think much of human behavior (or lack thereof) in these matters can be more simply explained.

What’s at work is a concept a friend of mine described to me more than 20 years ago – something he called “the hassle factor.”  It was a philosophy he routinely applied in many aspects of his personal and professional life.  Simply stated, presented with a choice between doing something that is hard, time-consuming, complicated, or even inconvenient, and doing something else, my friend – and, in fairness, human beings generally seem to be – inclined to opt for the latter.

Of course, the “hassle factor” CAN be trumped by exterior needs or forces, as anyone who has endured the long lines at the DMV or sat through the background music on an interminably long customer service line can attest.  That said, things like an unduly complicated 401(k) enrollment form/process can certainly serve as a barrier to plan entry, and there’s every reason to expect that the same might apply when it comes time to exit the plan.

Job change is a point in time at which a lot of important decisions are made—some voluntary and some forced upon us—and the disposition of one’s retirement savings account certainly looms large among them.  A recent EBRI Notes article examined what workers age 50 and above did with their defined contribution account balances at the point of job change, looking at data from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals age 50 and over.  EBRI analyzed responses from 2008 and 2010 for this study.

In terms of demographic characteristics, no significant difference was found between men and women in terms of their DC account balances and what they chose to do with them at job change.  And while married or partnered individuals were less likely to withdraw their assets and more likely to roll them over into an IRA than singles, the differences were small.

The EBRI analysis did find that a decision to take a withdrawal in cash declined with higher account balances, higher incomes, existing ownership of an IRA, and higher financial wealth. Not surprisingly, the decision to cash out rose with individual debt levels.

However, among those who left their employer but remained in the workforce, the most common outcome was to leave their retirement account balance with their prior employer’s plan.  The EBRI report notes that, unlike the outcomes detailed above, there was no clear trend between the financial variables, and the decision to leave those DC balances in the prior employer plans.

As for what might explain that outcome, the report noted that it might simply be a decision to postpone taking the money until it was needed, or that there “may be behavioral factors, such as inertia, driving what might be seen as a ‘non-decision.’”

Or, as my friend might have been inclined to say, a non-decision based on the “hassle factor.”

• Nevin E. Adams, JD

“Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” is published in the EBRI May Notes, available here.