- 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
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.
- 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.
- 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.”
See also:
- Tips for plan sponsors: 6 ways to build
effective 401(k) plans
- Tips for employees: 6 things you can do
today to boost your 401(k)
Investment and Insurance products:
Not Insured by FDIC or any Federal
Government Agency
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of or Guaranteed by a Bank or Any Bank Affiliate
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 America’s largest corporations. News, insights and
perspectives from Wells Fargo are also available at Wells Fargo
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version on businesswire.com: http://www.businesswire.com/news/home/20170622005367/en/
MediaWells Fargo & CompanyLeslie Ingberg,
612-667-0265Leslie.Ingberg@wellsfargo.com
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