An astute colleague of mine likes to quote Dwight Eisenhower: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” The former general and president hits the mark by capturing the irony of planning for any situation, particularly those where the results won’t be realized for a long time and where volatile external factors play a key role in determining the outcome. It raises the question: How does one plan for retirement when it’s so far away?
In the first two parts of our series on employing Millennials, we discussed generational traits of this young age group and how employers can still utilize employee benefits as effective recruitment and retention tools. However, in those examples we focused on benefits that had the possibility of instant utilization. For example, an employee who has broken his leg or has a parent with a chronic medical condition can immediately appreciate the importance of an employer sponsoring health coverage. Retirement planning is very different because the end goal is many years — even decades — away.
That’s where President Eisenhower’s incisive observation rings true. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. Plans change as the capacity and need to save fluctuates over the course of a person’s life. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals. All of this leads to the more pertinent question: How do employers provide Millennials with the tools they need to plan for their retirement and reap the rewards of providing such a valuable benefit along the way?
In part one of this series, we had some fun exploring generational characteristics of Baby Boomers, Generation X and the Millennials. Taking these traits into account, we shouldn’t be surprised to learn that Generation X workers expect to retire earlier than their Baby Boomer predecessors. Millennials entering the workforce are less jaded about their expectations regarding career longevity, however. Many believe they will hold multiple types of jobs and even varying career paths throughout their lives. For those who even appreciate the idea of traditional retirement, most Millennials intend to work past age 65.
Self-awareness and a realistic approach to the length of one’s working life is an important beginning to developing a retirement savings strategy. But the common culprit every generation faces regarding its retirement goals is the lack of planning. Millennials face a trifecta of additional hurdles as well:
If we compare student loan debts of the average Millennial as compared to a similarly educated Generation X employee, the Millennial’s debt will be greater in amount and more immediate in priority. When we add in competing financial priorities such as credit card debt, car payments and other expenses associated with “getting started” in life, it’s easy to understand why saving for retirement might not be on the forefront of that new employee’s mind. From a plan design perspective, automatic enrollment and default investments can be valuable features in a company’s 401(k) plan to help spur Millennial participation.
Automatic enrollment in a 401(k) plan helps new hires develop the habit of storing away a portion of their salary for an eventual use. Annual accelerated increases in the contribution amount can serve as a regular nudge for those employees. Generally, an employee experiences at least a nominal increase in wages each year. If the 401(k) plan is designed to automatically increase a participant’s elective salary deferral contribution by a small amount, the theory is that the employee won’t notice or “miss” the extra money being saved. Starting young, this can serve as an important foundation on which the Millennial savers can build when they are in a better financial position to do so.
Given their fastidious approach to making decisions, even spending decisions, Millennials are undoubtedly the most self-aware member of all recent generations. Consider, now, that there are only three things to do with money: spend it, save it or give it away. Millennial employees have a great understanding of how to spend their money, balancing bills with lifestyle choices. They are also naturally wary of debt, being hyper-aware of the American standard of living having been raised by the most leveraged generation in history, the Baby Boomers. Given their penchant for public service and civic responsibility, they also have a natural understanding of philanthropy that is probably mature beyond their years. However, when it comes to saving money for long-term growth, they are largely unprepared.
So, getting your Millennial new hire to contribute to the 401(k) plan is only part of the battle. Financial education is a key component to helping those habits stick and encouraging active participation in the plan for years to come. First of all, most automatic deferral arrangements place initial contributions in safe default investments. Many of those investments are some kind of target-date fund designed to provide an eventual benefit of a specific amount by a future date. In order to respond to market and economic changes, as well as variances in contributions, these funds are designed to hold a mix of asset classes that naturally change over time. Employees who have awareness as to how these funds work and can properly utilize them in the context of their own investment strategy, will have a much better chance of fulfilling their retirement savings goals.
Employer plan sponsors should leverage the tools of their investment providers and set up specific workshops dedicated to educating Millennial employees about not only the importance of investing, but actually how to develop a method by which they understand and choose available investment options. Spoiler alert: Millennials are tech savvy. Employers should use a communication medium that resonates best with their audience. Mobile investment updates and smartphone-friendly apps that allow employees to control their 401(k) accounts are logical places to begin reaching the Millennial investor.
Finally, peer groups within an organization can help newer employees or those with a less sophisticated financial acumen become more comfortable with the retirement benefits that are available. Such groups should include a more senior employee mentor and other Millennials of similar professional experience. Employers should consider both a mix of plan design features and creative communication approaches to meet their Millennial employees at a place of receptiveness and response. In other words, you have a 401(k) plan….let’s make sure it works for everyone.
For more information, contact us.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including taxation and healthcare reform.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
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