Employees under age 35 are likely to be more dependent on DC plans for their retirement savings than previous generations—but less attention is being paid to them than on their boomer counterparts, according to a U.S.-based study by Northern Trust. And with the boomer generation moving closer to retirement, the time has come for employers to direct time and resources to those younger employees.
“Employers should focus on this group of younger workers for two reasons,” says Bob Browne, chief investment officer of Northern Trust. “First, this is a generation of workers for whom company-sponsored DC and 401(k) plans represent the primary—and in many cases the only—vehicle for retirement savings. Second, these young workers still have time to make and implement choices that will have a meaningful, positive effect on their financial situation later in life.”
Northern Trust and Greenwich Associates interviewed 45 DC plan sponsors and 11 DC investment consultants for their report, The Path Forward: Engaging the Younger Employee in DC Plan Participation. While most plan sponsors expressed confidence in their plan’s ability to prepare younger workers for retirement, nearly 40% of plan sponsors and a majority of consultants interviewed were neutral or less than confident on that question.
To better engage this younger demographic, Northern Trust suggests the following initiatives:
- Segment plan participants by age groups. Only 4% of plan sponsors said they have established specific goals for engaging younger workers in their DC plans, and just 24% have strategies aimed at increasing participation by different age groups.
- Tailor education plans to participant needs. Plan sponsors reported that under-35 workers lag their older colleagues in both participation rates and contribution levels; respondents also noted that younger workers are typically more receptive to new media such as social networking as an education tool.
- Implement more auto features. The majority (86%) of respondents say that auto-enrollment, auto-escalation and similar features have proven effective for younger employees.
- Align target retirement date funds with participant needs. Under-35 employees are likely to select the target date investment option. Plan sponsors should profile their participants—based on age and savings demographics, other retirement benefits and risk tolerance, among others—and select a glide path that most closely matches that profile.
- Require participation. Of those surveyed, 63% said they believe DC plan participation should be mandatory, which would have an impact on younger workers, who enroll at lower rates than those over age 35.
“Setting goals and building marketing strategies to reach these younger workers is a critical early step in improving DC plan funding effectiveness,” says Jim Danaher, managing director of the defined contribution solutions group at Northern Trust.
“Workers who wait until the age of 40 or older to begin saving for retirement very likely will fall short of their financial goals. By contrast, workers who begin participating in DC plans in their 20s or even early 30s have an opportunity to achieve their goals—if they stay engaged and make the right decisions.”