Analysis of Generation Y participants—born between 1979 and 1991—in defined contribution plans revealed stronger selection of target-date funds and Roth 401(k) options compared to other age groups, according to data from Fidelity Investments, a large retirement plan services provider.
In the second quarter of 2012, Fidelity analyzed its approximately 11.9 million 401(k) accounts, including 2.2 million Generation Y participants. Among the findings, members of Generation Y were more likely than older participants to:
• Be properly allocated. Investment advisors recommend that riskier investments with higher growth potential, such as stocks, be held when participants are young and that less risky, lower-growth assets, such as bonds, become a higher percentage of a portfolio as retirement nears.
Across all 401(k) participants in the study, 45 percent were within 10 percentage points of a gauge used to determine an appropriate age-based asset allocation. But for Generation Y participants, that number jumped to 67 percent, illustrating how younger investors have embraced age-based asset allocation.
• Invest in target-date funds. Many younger plan participants achieved diversification through target-date funds, which shift their holdings toward less-risky assets as the target retirement year nears. Target-date funds are the most common default option for plans with automatic enrollment.
Among plans that offered target-date funds as investment options, 51 percent of Generation Y participants had 100 percent of their assets in these funds compared to 30 percent of participants of all ages.
• Select a Roth 401(k) option. Roth 401(k) plans are funded with post-tax dollars but their distributions, including all earnings, provide tax-free income during retirement (whereas traditional 401(k)s generally are funded with pretax dollars, and their distributions are taxed as income during retirement). The more years of potential earnings growth, the greater the value of selecting a Roth option, many experts advise.
In addition, because Generation Y participants are likely to be in a lower tax bracket early in their careers, the potential tax saving from investing pretax dollars in a traditional 401(k) may be more limited than for late-career participants in higher tax brackets.
The number of employers offering a Roth 401(k) rose to 35 percent in 2012 from only 10 percent five years earlier, the study found. Large employers were more likely to offer a Roth 401(k) option, and as a result more than half (55 percent) of all participants in the study were in plans that offered a Roth 401(k), up from 15 percent five years earlier.
In plans that offer a Roth 401(k), use of the savings option was greatest among Generation Y participants, with 8.8 percent contributing to them vs. 5.8 percent among all active participants.
Too Many Saving Too Little
A separate survey of 3,370 defined contribution plan participants conducted in the first quarter of 2012 by Diversified, another large 401(k) services provider, found that:
• A substantial 61 percent of participants were saving 10 percent or less of their annual salary—with 25 percent saving 5 percent or less.
• Only 19 percent said they were contributing significant funds into their retirement account, saving more than 15 percent annually.
The good news is that 38 percent of participants reported that they had increased the amount of money they are saving for retirement in 2012 over 2011. And while 11 percent took a loan against their plan over the past 12 months, just 3 percent said they took a permanent hardship withdrawal.
Retirement Income Guesses
In another finding, more than one-third of participants (34 percent) either “guessed” or “made up” estimates for the income they will need in retirement, and only 30 percent said they consulted with a professional for help setting their goals.
“There’s no reason to guess,” Patricia Advaney, senior vice president, participant solutions for Diversified, told the press. “With the abundance of help available—from online tools to guidance to advice—it’s much easier today for plan participants to calculate a retirement income goal, and then take appropriate actions to get there.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
'Do-it-Myself' Investors vs. Target-Date Funds, SHRM Online Benefits, August 2012
Encourage Employees to Defer Adequate Pay to 401(k)s, SHRM Online Benefits Discipline, May 2012
Secret to 401(k) Success: Income Replacement Ratio, SHRM Online Benefits Discipline, April 2012
Use of Target-Date Funds Continues to Surge, SHRM Online Benefits Discipline, March 2012
The Roth 401(k): A 'Value Add' for Your Employees, SHRM Online Benefits Discipline, updated January 2012
SHRM Online Benefits DisciplineSHRM Online Retirement Plans Resource Page