Vanguard Finds That Great Recession Did Not Derail Millennial 401(k) Savers

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Oct 08, 2015, 10:00 ET

VALLEY FORGE, Pa., Oct. 8, 2015 /PRNewswire/ -- Millennials saving for retirement are bucking reports of savings insufficiency and equity aversion, according to a new white paper published by Vanguard researchers. The auto savings generation: Steering millennials to better retirement outcomes finds that participation rates, saving rates, and equity allocations for millennial participants (ages 18–34) have been on the upswing over the last decade in defined contribution (DC) plans. Despite the impact of the Great Recession on millennials' income and job prospects, the advent of automatic plan design features and the increasing adoption of target-date funds have put millennials on the right path to retirement readiness.

Millennials' participation in 401(k) plans in 2013 was higher than that of the equivalent age cohort in 2003, in large part driven by automatic enrollment plan design. In Vanguard plans with an automatic enrollment feature, 87% of millennials participated in their workplace retirement plan—an increase of more than 70% compared with ten years prior. With the continued evolution and improvement of DC plans, millennial investors are the first generation with access to automatic plan features from the beginning of their working years.

"Automatic plan design features and the rise of target-date funds are reshaping retirement plan outcomes for all generations," said Jean Young, author of the paper and a senior research analyst with the Vanguard Center for Retirement Research. "However, these innovations are by far having the greatest—and most positive—impact on the retirement savings of millennials."

Vanguard reported an improvement in total saving rates across all generational cohorts in 2013, with millennial investors demonstrating the strongest gains. The average millennial 401(k) deferral rate was 3.6% in voluntary enrollment plans and 4.2% in automatic enrollment plans—a jump from the 3.1% average contribution rate in 2003 for individuals 18–34. In plans that offer a company match, average total contribution rates for millennials climbed to 5.1% in voluntary enrollment plans and 6.6% in automatic enrollment plans in 2013—up from a 4.2% average contribution rate for individuals 18-34 in 2003.

Automatic escalation savings features are likely influencing this improvement in savings behavior. Many Vanguard plan sponsors have introduced this option as a complement to automatic enrollment, with 70% of plans offering both features as a default. In automatic enrollment plans, nearly two-thirds of millennials were also enrolled in an automatic increase feature. However, even in voluntary enrollment plans, millennial participants were more likely to sign up for automatic annual deferral increases.

Despite experiencing two significant bear markets during their lifetimes, millennials' equity allocations also increased over the ten-year period. Median equity allocations rose to 89% in 2013, up from 82% in 2003, primarily due to climbing adoption of target-date funds. According to Vanguard research, portfolios with higher equity concentrations are appropriate for younger investors, given their long time horizons and ability to withstand short-term market volatility, along with the equity risk premium.

For many participants, including millennials, target-date funds can provide a convenient way to save for retirement, and target-date fund usage has increased dramatically over the last decade. In 2013, 64% of millennials in automatic enrollment plans invested in a single target-date fund, in addition to 23% in voluntary plans.

"Sponsors are increasingly electing target-date funds as the default investment for their retirement plans," Ms. Young said. "Target-date funds have simplified the investment decision-making process for participants, who may not have the time, willingness, or ability to construct an appropriately diversified portfolio on their own."

The Vanguard study found that millennials were more than twice as likely as baby boomers to invest in an all-in-one investment option (e.g. a target-date, target-risk, or traditional balanced fund). Vanguard's research shows that participants utilizing professional managed allocations have better portfolio diversification than those constructing portfolios from a menu of plan options.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

About Vanguard
Vanguard is one of the world's largest investment management companies. As of August 31, 2015, Vanguard managed more than $3.2 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 300 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

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SOURCE Vanguard