Most Younger Workers Don’t Contribute to Workplace Plan

While the portion of workers in their 20s who participate in a workplace savings plan such as a 401(k) or 403(b) has increased in recent years with the help of automatic enrollment, the majority still do not participate, according to data on plans Fidelity administers. Less than half (44%) of eligible workers in their 20s contribute to their workplace plans today Fidelity's quarterly release on trends in 401(k) industry suggests.

Scott David, President of Workplace Investing at Fidelity Investments, told PLANSPONSOR.com that sponsors should be concerned that younger employees are not participating, as most are not going to be eligible for a defined benefit pension in their lifetime. Sponsors should consider auto enrollment, especially to get Gen Y enrolled, according to David.

A recent analysis from Fidelity indicates that auto enrollment in 401(k) plans is proving to have the biggest impact on younger and lower-compensated employees (see “Fidelity: Auto Enrollment Working as Intended”). Last year Fidelity told PLANADVISER.com that the younger generation is open to the “do-it-for-me” approach. Furthermore, Fidelity suggested retirement plan advisers are key to helping ensure that the youngest generation has enough retirement savings, and advisers have a huge opportunity to start relationships early with that group (see “Gen X, Y Could Use More Savings Help”).

Fidelity found that when workers reach their 30s and 40s, savings behavior improves, with participation rates of more than 65% and a higher average elective deferral rate of 7.7% of salary.  However, the frequency and the prevalence of taking out a loan against workplace savings increases significantly as many at this life stage have competing financial priorities. When workers reach their 30s and 40s, many are focused on buying their first home, saving for their children's education, and saving for retirement, as well as managing debt.

Nearly one in four workers (23%) in this age group have one or more outstanding loans, and more than one in 10 (10.6%) initiated a loan over the past 12 months. Workers in this age group also tend to be repeat loan users, as Fidelity found nearly one-third (31%) of continuous active participants in this age group who took a loan last year also took one this year.

David said Fidelity advocates limiting loans to only one outstanding at a time. "Sponsors have been hesitant to impose a limit, but data shows it can be detrimental to retirement savers," he noted.

By the time participants reach their 50s, some of the pitfalls and behaviors evident among younger workers are much improved.  The Fidelity analysis showed participation rates among this age group are higher, with more than 70% participating, and they also contribute an average of 10% of their salary.

However, poor asset allocation detracts from overall results, according to Fidelity. More than one in 10 pre-retirees (11.4%) hold no equities in their 401(k) plan, a strategy that has historically resulted in significantly lower returns on an inflation-adjusted basis than those of more diversified portfolios, while 14.2% are 100% invested in equities, an overly aggressive approach that leaves them much more vulnerable to a market downturn.

Fidelity suggests that as employees reach pre-retiree years, sponsors provide more education about savings and investing, and even go so far as to provide advice services, according to David.

David points out though that diversification has improved extremely, thanks to asset allocation funds, which Fidelity finds to be the most popular investment choice among participants. He also notes that the data shows equity extremes in all age groups.