- Gen Xers borrow the most from their 401(k) plans
- Boomers participate in 401(k) plans at a greater rate than younger coworkers, but investment diversification lags
CHARLOTTE, N.C.--(BUSINESS WIRE)--Rates of saving for retirement and investing habits differ from one
generation to the next, according to a recent analysis of four million
people who participate in 401(k) plans provided by Wells Fargo.
Retirement plan data for Boomers, Generation X, and millennials reveal
ways each generation can learn from the others when it comes to saving
for retirement. The full analysis can be found in the Wells Fargo 2017
Driving Plan Health report.
Millennials show 13% gain in participation in past five years
Millennials have demonstrated the biggest gains in the percentage of
those participating in their 401(k) plans over the last five years, with
an increase of 13.3%. They’re also the most-diversified generation, with
83% meeting Wells Fargo’s minimum diversification goal*. This
diversification number drops to 80% for Gen X and 77% for Boomers. In
addition, 30% of millennials contribute enough to maximize their full
employer match when one is offered. This number falls to 27% for Gen X
and 25% for Boomers.
“This engagement among millennials is encouraging because the sooner
they get started, the more prepared they will be for retirement — they
have the power of time to help grow their nest egg,” said Mel Hooker,
director of relationship management for Wells Fargo Institutional
Retirement and Trust. “This generation is benefitting from legislation
that made it easier for employers to automatically enroll employees into
their 401(k) plan, and from the use of default investments that help
them meet a minimum level of diversification.”
Millennials are also the greatest users of Roth 401(k) plans, which
allow participants to contribute after-tax income. Millennials use this
option, when offered by their employer, at a rate of 16% compared to 11%
of Gen X and 8% of Boomers.
“It’s important to note that the use of Roth 401(k) plans is an
intentional choice on their part, perhaps as a tax diversification
strategy,” added Hooker.
*Minimum diversification goal in 401(k) plans is defined by Wells
Fargo as when a participant is either (1) invested in a diversified
investment option such as a target-date fund, managed account product,
or comprehensive advice program, or if they are self-directed or (2)
invested in at least two different classes of equity funds and at least
one fixed income fund and less than 20% invested in employer stock.
Diversification and asset allocation do not assure or guarantee
better performance and cannot eliminate the risk of investment losses.
Is Gen X feeling the squeeze?
Gen X has seen an 11% uptick in participation over the last five years.
However, they’re leading the pack in loans from their 401(k) plans: 25%
of Gen X participants have a loan, compared to 16% of millennials and
19% of Boomers.
“This may be a case of sandwich-generation syndrome, in which people are
juggling the challenge of raising kids and helping aging parents — all
during a period of increasing financial complexity in their lives,” said
Hooker. “Unless you need the money for an emergency, however, it’s best
to resist the urge to tap your retirement funds. And if you need to do
it, be sure to understand the terms.”
While many 401(k) plans allow participants to borrow from their 401(k)
accounts, there can be some unintended consequences that people need to
be aware of before making that decision.
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Smaller retirement savings: When you take out a loan, you are
losing the benefits of investment growth, and that could leave you
with a smaller retirement savings. How much smaller? This depends on a
number of factors, including the size of the loan, the repayment
period, whether you continue contributions during this period, the
earnings on your account, and the loan interest rate. Also, if you
stop contributing while you are paying back your loan, you won’t
receive any employer matching contributions.
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Repayment requirements: If you lose your job or take another
one, you’ll have to repay the money quickly, usually within 30 to 60
days. If you can’t, the IRS considers the money you’ve taken out to be
a withdrawal, which means you’ll have to pay taxes — and if you’re
under age 59½, you may owe a penalty as well.
Boomers participate at higher rates, but lag in diversification
Early this year, the first wave of Boomers turned 70½, reaching the age
at which they are required to start drawing down their 401(k) savings.
As this population nears retirement, the number of those participating
in their plan has increased by 8.3% over the last five years; although
this is a lower rate of increase than millennials and Gen X, overall
more Boomers participate than younger generations.
A little over a third of all participants are more conservative in their
own investments than a typical target-date fund appropriate to their
age. But more than half of Boomers have greater equity exposure than an
age-appropriate target-date fund, which could expose them to significant
investment risk.
“It’s a delicate balance; lower returns for overly conservative
participants can hurt balances in the home stretch to retirement, but
overly aggressive participants face an even larger potential threat to
their retirement income in the form of investment risk,” said Hooker.
“It’s important to encourage employees to create a plan for saving and
stick to it. Consistency in contributions and diversification are a
better path to success than chasing returns or trying to time the
market, because retirement success is a long-term proposition.”
Who is on track?
For the purposes of setting a goal and tracking progress, Wells Fargo
measures the percentage of participants on track to replace 80% of their
pay in retirement*, and it appears that many of the behaviors in which
millennials take the lead are pointing to a higher percentage on track:
66% of millennials are on track to reach this goal in retirement,
compared to 51% of Gen X and 41% of Boomers.
*Income replacement assumptions include a goal of replacing 80% of
income during retirement, a retirement age of 65, and Social Security
beginning immediately. In addition, the calculation assumes income
increases of 2% per year, investment returns averaging 7% annually
before retirement (and 4% after retirement), and 3% annual inflation in
retirement.
How employers are helping
While there are many ways employers can help their employees save more
for retirement, this analysis points to some stand-out opportunities for
employers.
1. Closing the participation gap through automatic enrollment
While participation remains lowest among younger, more recently hired,
and lower-earning employees, these populations have seen greater gains
than their counterparts, leading to a narrowing of the participation gap
for all three demographic dimensions. The biggest driver? Automatic
enrollment — when this younger age group is automatically enrolled, 85%
stay in the plan. In the absence of automatic enrollment, the
participation rate falls to 38%.
2. Increasing default deferral rates
When employers automatically enroll their employees in the 401(k) plan,
the most common default deferral rate is 3%. At this rate, 11.1% of
people opt out of the plan — meaning nearly nine in 10 employees stay in
the plan. However, when people are automatically enrolled at a 6%
contribution rate, participants have a nearly identical reaction, with
11.3% opting out of the plan. Given contribution-rate challenges,
defaulting employees at a higher contribution rate to begin with may
help significantly.
3. Automating regular contribution increases
Today, 20% of plans include a feature that automatically increases their
employees’ contribution rate on a regular basis (often annually) and
requires employees to take action to turn it off, or “opt out.” This is
a significant uptick from 8% of plans that offered this feature in this
fashion five years ago. In addition to encouraging higher contribution
rates by defaulting employees into a plan at a higher rate to begin
with, adding automatic contribution increase as a feature employees need
to elect to turn off, rather than offering it and making them take the
steps to turn it on, will drive employees to a 10% contribution rate
more quickly than if they simply stagnate at the automatic enrollment
contribution rate.
“Employers don’t have to guess anymore. The data reveal exactly what
they need to do to move the needle on each behavior,” said Hooker. “In
particular, when we see retirement plan contribution rates are in a
stagnant state relative to other important behaviors, we can put in
place the plan design features that will help improve this metric.
Employers can use the data to inform their decisions based on their
defined goals for helping their employees save for retirement.”
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Recordkeeping, trustee, and/or custody services are provided by Wells
Fargo Institutional Retirement and Trust, a business unit of Wells Fargo
Bank, N.A.
Wells Fargo Bank, N.A. and its affiliates, including their employees,
agents, and representatives, may not provide “investment advice” to any
participant or beneficiary regarding the investment of assets in an
employer-sponsored retirement plan. Please contact an investment,
financial, tax, or legal advisor regarding your specific situation.
About Wells Fargo
Wells Fargo & Company (NYSE:WFC) is a diversified, community-based
financial services company with $2.0 trillion in assets. Wells Fargo’s
vision is to satisfy our customers’ financial needs and help them
succeed financially. Founded in 1852 and headquartered in San Francisco,
Wells Fargo provides banking, insurance, investments, mortgage, and
consumer and commercial finance through more than 8,500 locations,
13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has
offices in 42 countries and territories to support customers who conduct
business in the global economy. With approximately 273,000 team members,
Wells Fargo serves one in three households in the United States. Wells
Fargo & Company was ranked No. 25 on Fortune’s 2017 rankings of
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