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Millennials’ Under-Saving Nixes Full Company Match

    Leaving matching contributions on the table will cost young workers in retirement

    By Stephen Miller, CEBS 11/20/2014

    While participation in employer-provided 401(k) plans is strong among young adults, many workers in their 20s and 30s are not saving enough to take full advantage of their employer's 401(k) match—potentially leaving thousands of dollars on the table and negatively impacting their long-term financial health, according to consultancy Aon Hewitt.

    An analysis of more than 3.5 million employees eligible for defined contribution plans revealed that while the average participation rate of young Millennial workers (ages 20-29) is 73 percent—and slightly higher (77 percent) for older Millennials (ages 30-39)—many are saving at a low rate. Nearly 40 percent of 20- to 29-year-olds and 31 percent of 30- to 39-year-olds are saving at a level that is below their company match threshold.

    "Automatic enrollment has significantly improved participation in 401(k) plans for all employees over the past 10 years—but even more so for young workers," said Rob Austin, director of retirement research at Aon Hewitt, in a news release. "However, once they're in the plan, young workers seem to fall victim to inertia, with many continuing to save only at the default rate, or slightly above, and risking their long-term savings by not receiving the full employer matching contributions that are offered."

    Consider a 25-year-old worker who makes $30,000 annually and works for an employer that provides the typical company match of $1-for-$1 up to 6 percent of salary. If that 25-year-old starts saving the full match amount of 6 percent immediately on employment and continues to do so until she reaches age 65, she'll have more than $950,000 saved in her 401(k), Austin noted.

    But if that same worker waits until age 30 to begin saving 6 percent, she will have less than $715,000 saved at age 65. Five years of missed contributions will cost her $225,000 over her career. “In order to make up the gap, she would need to increase her savings by 4 percent, and start saving 10 percent of pay each year for the next 35 years,” assuming 2 percent annual pay growth and 7 percent annual investment growth, Austin said.

    "For young workers, it may seem insignificant to increase 401(k) contributions by a few percentage points—particularly at a point in their career and life when they're likely earning a smaller salary—but the long-term effects can be remarkable," explained Austin. "Employers can help Millennials improve their financial outlook by encouraging them to save at least at the match threshold through targeted communications and online tools and resources. To take it a step further, they can also increase the default contributions so that workers are saving at the match threshold immediately upon enrollment into the plan, or by offering automatic contribution escalation, which increases a workers' contribution rate over time. The bottom line is young workers need to save more, starting now."

    Millennials’ Investments

    Many Millennial workers are using target-date funds, the most common automatic default option, and are therefore more heavily invested in stock funds (equities) than older workers. Workers ages 20-29 have 83 percent of their balance allocated to equities, while workers ages 30-39 have 76 percent of their exposure to equities, the analysis showed. Equities have greater potential for “bull market” growth in value over a long period (10 to 20 years), but can face steep “bear market” declines over shorter periods.

    "Younger workers benefit from having a longer time horizon in which to invest and therefore can take more risk with their investments," said Austin.

    Stephen Miller, CEBS, is an online editor/manager for SHRM.