Retirement Readiness: Bridging the Gap Across Generations Survey Highlights
Consulting/Outsourcing 2010 Retirement Readiness Study 1
Retirement Readiness: Bridging the Gap Across Generations Over the past decade, the rise in defined contribution plans as the primary employer-sponsored retirement vehicles has placed more risk and responsibility on individuals for achieving retirement security. While Baby Boomers and employees from earlier generations may have once been able to rely more heavily on Social Security, pension plans and retiree medical benefits, younger employees are more likely to find themselves relying primarily on their own savings. This report examines participant behavior in defined contribution plans and retirement readiness across three generations—Generation Y, Generation X and younger Baby Boomers. It shows how each generation faces their own set of challenges in preparing for retirement and offers solutions employers can utilize to help their diverse employee base achieve their retirement goals. This report includes in-depth analyses and data from two recent Aon Hewitt reports, 2010 Universe Benchmarks: How Well Are Employees Saving and Investing in 401(k) Plans and Retirement Income Adequacy at Large Companies: The Real Deal 2010. The majority of participant behavior data was captured through 2009, unless otherwise noted. In total, data from more than 2.9 million eligible employees was analyzed.
Summary of Findings
Generation Y Generation Y, also known as the Millennial Generation, includes workers ranging from 18 to 30 years of age. The group is known for being technologically savvy. They are characterized as realistic, confident and open to changes, with an affinity for opinionated dialogue and free spending. It is also a relatively large generation, with significantly more individuals than Generation X. Generation Y is the least likely demographic to have access to a pension benefit, thus pushing risk and personal responsibility to the individual. At the same time, retirement needs are expected to continue to rise for this generation due to increasing life expectancy and growing retiree medical costs.
While defined contribution plans are critical to Generation Y employees, only half of the employees in this generation who are eligible to participate in their employer-sponsored defined contribution plans do so. On average, Generation Y participants contribute only 5.3% of pay, and 41% don’t save enough to receive the full company match.
Generation Y—Overview Significant issues with current saving behaviors:
– Only 50% of eligible employees participate.
– The average savings rate is relatively low at 5.3% of pay.
– More than 40% of savers don’t contribute enough to obtain the company match.
– Six in ten terminated participants cashout their savings rather than roll over monies.
Automation can play a key role in getting Generation Y employees on the right path. Employers should be careful to use defaults that will lead to optimal behavior.
Further, for Generation Y workers, communication needs to be quick and easy to understand, and require minimal effort on the part of the employee. Technology—including the use of smart phones and other devices—can also play a key role.
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These low savers, coupled with nonsavers, mean that 70% of Generation Y employees leave free employer money on the table. In addition, cashout behavior among participants in this generation is significant. Sixty percent will cashout their retirement savings when changing jobs. This is an important finding given Generation Y is also the most mobile of the three generations.
As a result of the low participation and savings rates of the group, the typical Generation Y worker is projected to have a shortfall of more than six times final pay upon retirement at age 65. For those without a pension plan, the average shortfall increases to nearly eight times pay. Another factor contributing to this large discrepancy between retirement income and retirement needs is increasing health care costs at retirement. To meet all of their financial needs in retirement, it is expected that many Generation Y participants may need to work up to or past age 67.
It should come as no surprise that savings plan automation has the greatest impact on the saving behaviors of Generation Y participants. In 2009, nearly 60% of new Generation Y enrollees were defaulted through automatic enrollment when it was available rather than selecting their own savings rate based on their needs. Participation levels were significantly higher when automatic enrollment was offered. Because of default behavior and inertia, automatically enrolled participants are also more likely to invest in a premixed portfolio (including target-date and target-risk funds) and put all assets in one premixed portfolio than the two older generations. Therefore, their retirement investments tend to be better diversified than those of their predecessors. Their portfolios are also more likely to be consistently rebalanced, which is critical given recent market volatility. Additionally, they have the highest usage of automatic contribution escalation, whereby their savings rates will be automatically boosted each year.
While Generation Y employees are often not on the right path, the good news is that this group has more time to recover and is responding well to automation. Automatic enrollment is clearly having a big impact. When coupled with automatic contribution escalation and rebalancing, Generation Y savers can achieve, and sometimes even exceed, their projected retirement savings needs.
Generation X Generation X workers are in their early 30s to mid 40s. They are typically results-driven, adaptable and flexible, sometimes skeptical, and strongly focused on achieving a work-life balance. Like Generation Y workers, Generation X individuals are less likely to be covered by a pension plan than Boomers and are increasingly reliant on defined contribution plans for their retirement future.
Among eligible employees, one-third of Generation X workers are not contributing to their defined contribution plan. When they do save, their rate of contribution is higher than that of Generation Y, at 6.8% of pay, on average. Additionally, 30% of participants are saving less than the company match threshold, thereby missing out on additional contributions from their employers. Low savers, coupled with nonsavers, mean that half of Generation X employees leave free employer money on the table.
Generation X—Overview Concerns around saving behaviors:
– One-third of eligible employees don’t participate.
– The average savings rate is 6.8% of pay; however, 30% contribute less than match threshold.
– Many aren’t diversified, and 19% of participants do not allocate any monies to stock funds.
– Nearly 30% have loans outstanding, and 46% of terminated employees cashout their savings.
Automation can also play a key role; however, more backsweeping needs to be done to also solicit existing nonparticipants.
An array of investment advisory services is needed to reach the diverse needs of this demographic. This includes managed accounts, online advice and target-date portfolios.
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Investment behavior among Generation X participants is often suboptimal. Nineteen percent of these participants hold less than half of their assets in equities, despite having more than 20 years until typical retirement age. In addition, 29% of these workers have an outstanding loan, and cashout behavior is quite high. Nearly half (46%) of participants withdraw their assets in cash when they terminate employment.
Similar to Generation Y, the retirement needs of Generation X workers continue to mount with increasing longevity, a higher retirement age for collecting unreduced Social Security benefits, decreased coverage by pension plans and less (or no subsidy for) retiree medical benefits. Based on current savings patterns, the typical Generation X employee is expected to have a shortfall of 4.2 times pay at retirement. This shortfall increases to 6.4 times pay for those not covered by a pension plan.
Generation X employees have 20 to 30 years until they reach age 65 retirement, so taking significant action in the near term can help improve the outcomes. Investment advisory services and tools, such as target-date portfolios and managed accounts, can help employees in this generation manage more complex financial situations. Automation can also play a strong role, and tools like automatic escalation and rebalancing can assist employees in accumulating sufficient retirement assets.
Younger Baby Boomers Younger Baby Boomers are those in their late 40s through mid-50s. This research focuses on this subgroup rather than all Baby Boomers due to their anticipated longer investment time horizon. Because of this time horizon, a change in behavior can still influence their retirement preparedness. Younger Boomers comprise about a quarter of the working population. They are generally known to be work-centric, independent, competitive and loyal to their employers. These employees are more likely to have access to a pension benefit, although defined contribution plans are also a key component of their total retirement package.
This group is more likely to save for retirement than the other generations and is more likely to save at a higher level. Among younger Baby Boomers, three-quarters (76%) of eligible participants actively save in their defined contribution plans, deferring, on average, 8% of pay. Still, there is room for improvement: About one-quarter of participants do not participate, and about a quarter (24%) of savers do not save enough to take full advantage of employer matching contributions. Additionally, some younger Baby Boomers—those aged 50 and older—qualify for catch-up contributions. However, among those who are eligible, only 12% take advantage of the catch-up feature.
Younger Baby Boomers—Overview Significant issues with current saving behaviors:
– Three-quarters (76%) of eligible employees participate.
– The average savings rate is 8% of pay, although 24% of savers miss out on employer matching dollars.
– Only 12% of those eligible take advantage of the catch-up contribution feature.
– Diversification and rebalancing remains suboptimal for many participants.
Personalized support is required for younger Boomers, including financial planning assistance and access to an array of investment advisory tools.
Additionally, reminders and personalized messaging regarding the ability to defer more, and on the use of catch-up contributions, should be provided.
By the end of 2009, the average 401(k) plan balance among by full-career younger Baby Boomer participants was $161,440. Due to the economic and financial climate, many participants in this generation still have significantly lower balances than they did in 2007. Surprisingly, company stock remains over allocated among some younger Baby Boomers, with 14% investing more than half of their
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401(k) balance in employer stock. Most participants in this generation do not rebalance, with only 18% of participants making any sort of investment transaction during a year. Loan activity remains significant with nearly one-third of participants having a loan outstanding (29.5% at year-end 2009).
The average younger Baby Boomer is projected to have the smallest savings shortfall among the generations in this study, at 2.8 times pay. This is mainly due to legacy defined benefit plans and lower retiree medical costs. Although the study predicts a retirement income shortfall at age 65, workers in this generation who have a defined benefit plan can reduce or eliminate the shortfall by delaying retirement just two years to age 67. Unfortunately, the news is not as positive among employees who do not have access to a defined benefit plan. These younger Baby Boomers are expected to have a shortfall of 5.3 times pay at retirement—quite distant from a financially secure retirement.
To assist younger Baby Boomers and help bridge that gap, more personalized support is needed, including financial planning assistance and access to an array of investment advisory tools. According to recent Aon Hewitt/Financial Engine research, older workers and those closer to retirement more often prefer managed accounts as the tool to help with their retirement savings. Additionally, reminders and personalized messaging regarding the ability to defer more, and on the use of catch-up contributions, should be provided.
Contact Information Pamela Hess, CFA Director of Retirement Research Aon Hewitt +1.847.295.5000 email@example.com Rob Reiskytl Practice Leader of Retirement Strategy and Design Aon Hewitt +1.612.339.7501 firstname.lastname@example.org
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