Are your plan sponsor clients millennial-ready?
January 25, 2017
Over the past few decades, defined contribution (DC) plans have gradually adjusted their plan designs and investment lineups to accommodate a participant base heavily made up of baby boomers. However, a shift in plan demographics could be changing that trend — the rise of millennials as a key segment of DC plans.
Born between the early 1980s and early 2000s, millennials recently have become the largest demographic cohort in the nation.1 One-third of them have entered the workforce, and more are on the way. That means swelling numbers of younger workers are showing up on plan sponsors’ participant rosters.
What do these demographic changes mean for your plan sponsor clients’ plans? Millennials’ distinctive attitudes and behavior can warrant a fresh look at the plan, from how to communicate with them to the all-important investment lineups. Here are some ideas to help your plan sponsors decide how to respond.
Millennials at a glance
This massive, vibrant generation is defined by a number of characteristics that offer implications for the structure of your clients’ retirement benefits. To give you an idea, it can generally be said that millennials are:
- The most highly educated generation in history
- Connected 24/7
- Distrustful of institutions
- Early savers
- Risk averse.
First the good news. Plan sponsors are facing little resistance to retirement plan participation among millennials. Fueled by doubts that Social Security will be there for them — and a keen awareness of the issues faced by their undersaved elders — millennials as a group began saving at a median age of just 22, earlier than any previous generation. Plus, more than 70% of those who have access to an employer-sponsored plan are participating, and on average they’re contributing a respectable 7% of their salaries.2
Their clear appreciation for workplace retirement benefits promises to keep plan sponsors on their toes, though. Two-thirds of millennials would consider switching employers to gain access to better retirement benefits.2 To retain their younger employees, plan sponsors need to keep their plans competitive. You can help them stay ahead of the curve.
But while millennials are off to a good start as savers, their investing approach may not be serving them as well. They’re stuffing almost twice as much of their savings under the mattress as they’re putting to work in the market. In fact, in one survey, millennials on average were shown to invest just 28% of their portfolios in stocks, compared with other age groups — including boomers, who are nearing or in retirement — who hold 46% in equities.3
Millennials’ risk aversion is borne out of exposure to a series of market upsets over their young lives, including the dot-com bubble, the post-9/11 crash, and the 2008-2009 recession. They’ve seen their parents lose jobs, as well as lose the value in their retirement accounts and homes. The global financial crisis eroded millennials’ trust in systems and institutions, and predisposed them to caution.
Further solidifying their world view, millennials have felt the sting of economic uncertainty in their own lives. Many of them came into the job market in times of high unemployment and a growing gig economy, when employer benefits were becoming far less certain. And many expect to be saddled with student debt for years, just one of the factors that have kept their rate of homeownership lower than any previous generation, and the largest number living with their parents since 1880.4 Under such circumstances, millennials’ conservative approach to investing arguably can be considered quite rational.
Implications for the plan lineup
Until millennials have time to pay down student debt and accumulate comfortable balances in their emergency funds and retirement accounts, they are likely to remain reluctant to jump into stock investing with both feet. So it may make sense to analyze your clients’ investment lineups to ensure they can accommodate millennials' conservative sensibilities. Lineups that offer target-date default options may be particularly worth careful review. These funds typically put between 80% and 100% of younger workers’ assets into stock, which may not be well matched to the needs of this risk-averse generation.
Of course, the glide paths of these funds generally are based on sound rationale: early-career investors have more time to wait out the ups and downs of the market in hopes of gaining higher returns. But that approach is effective only if investors stay put through thick and thin. Panicked exchanges into cash equivalents, shown to be favored by millennials, could have adverse and long-term consequences.
Fewer packaged solutions?
It also may be worth discussing with plan sponsor clients the value of re-engineering plan investment lineups away from heavily packaged solutions like target-date options, and moving toward a diverse set of standalone funds. Unlike previous generations that have been less engaged with retirement saving and investing, millennials as a group are more of a do-it-yourself generation of retirement savers, citing self-funded savings (55%) as their expected primary source of retirement income. Also, 22% frequently discuss retirement saving, investing, and planning with family and friends, compared with just 10% of Generation X and baby boomers.2
For your clients with growing numbers of younger workers, you may want to consider adding a more conservative balanced fund to their plan lineup, either as the default option or one of a diverse mix of core funds. A risk-managed fund could also help fledgling investors build up their balances and gain some experience with the markets until they feel emboldened enough to risk seeking greater growth.
Another way to add a conservative option to the lineup might be to consider a fund with a socially responsible mandate. These types of funds not only align to millennials’ social and environmental leanings, but because they typically eschew unnecessary risk, they also tend to be relatively stable.
Roth: A key consideration for millennials
Plan design that’s oriented for millennials is another area that advisors should discuss with their plan sponsor clients. One important plan design consideration for any younger employee is the Roth option, which provides for taxes to be taken from plan contributions when they go into the plan — an advantage for those early in their careers when their income levels are lower.
If your client’s plan doesn’t offer a Roth option, it may be time to discuss incorporating that feature. For plans that have a Roth feature and a growing millennial population, you may want to examine with your client whether sufficient numbers of younger participants are taking advantage of it. If not, you could discuss solutions such as targeted communications about the Roth feature, and how millennials can have the opportunity to reduce their lifetime tax bills and significantly enhance their retirement readiness by contributing after taxes.
Rethinking participant education for millennials
Once you and your clients are satisfied with the plan lineup and have addressed plan design, it could be a good time to size up how the plan is communicated to an employee base with a large contingent of millennials. Their unique sensibilities, and the fact that they may be more interested in retirement saving than their elders, may call for a fresh approach.
Whether promoting Roth or delivering broader educational messages, help sponsors better connect with millennials by taking a new tack. For example, millennials love videos and enjoy stories — especially when they’re accessible through their smartphones. Rather than rely on data and charts that don’t resonate with this generation, telling “people like me” stories of how others have overcome their investing anxieties can be effective. As the most educated generation in history, millennials are connected 24/7, and they enjoy research. You can help your clients capitalize on these positive characteristics by opening up the possibilities of reimagined education that can complement the plan investments and motivate this generational group.
By offering a well-considered investment lineup that’s supported by dynamic investor education, you can help your plan sponsor clients provide an appealing, competitive benefit that helps retain younger workers — and put them on track for a secure retirement.
1U.S. Census Bureau, 2016.
217th Annual Transamerica Retirement Survey of Workers, 2016.
315th Annual Transamerica Retirement Survey of Workers, 2014.
4Pew Research Center, 2016.
The views expressed represent the Manager's assessment of the market environment as of January 2017, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
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