Will Millennial Workers Switch to Emergency Savings?

Industry analysts predict the younger workforce may shift its focus towards emergency savings, instead of retirement, as a result of the COVID-19 crisis. Advisers can help with this shift.

Retirement industry professionals might soon see a significant shift toward emergency savings accounts as millions of workers struggle to make ends meet as a result of the COVID-19 pandemic.

This rings especially true for the Millennial workforce, which has now experienced three major market downturns—the dip in 2001, the Great Recession in 2008 and the downturn due to the coronavirus pandemic, says Kevin Boyles, vice president and business development director at Millennium Trust.

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“For people under 40 years old, because of the scar tissue that will come from this event, emergency savings might become the most important thing savers are thinking about going forward,” he explains. “Once the dust settles, there’s going to be a shift in mindset, especially for Millennials.”

Similar to previous generations, the Millennial workforce—which includes those between 25 and 40 years old—is currently wedged between multiple financial concerns. Millennials are paying off ballooning student loan debt, covering the cost of children and handling other expenses such as a mortgage payment or rent. As layoffs and furloughs will continue over the coming months, and potentially into the next year, these workers are feeling the effects of scarce savings.

“The challenge for many of these workers is that their emergency savings accounts couldn’t even cover two months of living expenses, and certainly not many months or longer,” says Jason Dorsey, a global researcher with an emphasis on the Millennial and Generation Z workforces at the Center for Generational Kinetics (CGK). “What we’ve seen is that many Millennials have drained their emergency savings accounts, and if they have retirement funds, they’re figuring out how to tap into those.”

On top of emergency savings, Dorsey expects Millennials to place an emphasis on core workplace benefits—not the pet insurance and catered lunch perks typically associated with the younger workforce.

“When people go through times of tremendous emotional, physical and financial stress, it becomes clear what’s actually important,” Dorsey says. “In the long term, benefits will be a decisive characteristic of the types of companies that Millennials will want to work for.” 

As the global workforce moves past the pandemic, Boyles and Dorsey anticipate, Millennials will immediately pursue rebuilding their emergency savings account at an aggressive pace to ensure their finances won’t be depleted again. Financial advisers, the experts say, will be expected to move along with them.

To do so, advisers will first have to adapt to tech-based platforms and digital communications and put an emphasis on self-service. Additionally, advisers will need to alter what financial wellness means to them, Boyles says. Saving for retirement is a vital step toward an employee’s financial wellness, but it’s not the be-all and end-all. “Retirement plan advisers need to understand that it’s this holistic concept,” he continues. “It’s not all about retirement, where you secure only that and then take the ancillary steps.”

Instead, it’s important to note what financial wellness means for every participant in each generation, especially if the adviser is not of the same age group as the worker. The priorities of a Baby Boomer are different from those of a Generation X worker, which can radically contrast those of a Millennial or Gen Z employee. Understanding the distinctive qualms, and integrating these notions into their practice, will set advisers apart.

“Advisers who choose to adapt to how these workers communicate, and place benefits and emergency savings accounts higher up, will likely succeed,” Dorsey says.

It’s also important to look at the severity of the situation at-hand: COVID-19 and its unprecedented effect, at least in living memory. While the global economy has faced downturns from the dot.com bubble bursting and the 2008 stock market crash, none have been attributed to a pandemic.

“The truth is that nobody working right now has been through a situation like this before,” Dorsey says. “We don’t want to just take a playbook that worked before and apply it blindly again.”

Therefore, it is imperative for advisers to look through the lens of their clients, to understand how the crisis is affecting them and how an emphasis on emergency savings, if possible, complements their well-being.

“We need to take a step back and look at the uniqueness of the situation,” Dorsey states. “Look at the uniqueness of the people going through this, and how you can best serve them.”

Transitioning into this new normal, it’s likely that the financial industry, like most of the workforce, will come out scathed and transformed, Boyles says. “You’re going to see profound impact on how people spend and save,” he concludes. “The financial services community need to begin to adjust their thought process for the other side, because everyone will come out of this changed.”

RBC Capital Markets Consents to SEC Share Class Sanctions

The firm is accused of disadvantaging certain retirement plan and charitable organization brokerage customers by failing to recognize and act on the fact that they were eligible for less expensive share classes.

RBC Capital Markets LLC has submitted an offer of settlement to the U.S. Securities and Exchange Commission (SEC) in connection with administrative proceedings in which the brokerage firm is accused of disadvantaging some of its retirement plan and charitable organization clients.

In a newly issued SEC order, the financial markets regulator says it has determined it will accept the settlement offer, in which RBC neither admits nor denies the SEC’s allegations.

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According to summary information in the order, from at least July 2012 through August 2017, RBC “disadvantaged certain retirement plan and charitable organization brokerage customers who maintained accounts at RBC by failing to ascertain that they were eligible for a less expensive share class, and recommending and selling them more expensive share classes in certain open-end registered investment companies (mutual funds) when less expensive share classes were available.”

These allegations closely echo those included in a sizable—and growing—number of other sanctions secured by the SEC after the conclusion of its 2018 “Share Class Selection Disclosure Initiative.” That initiative opened up a window during which brokerage firms and registered investment advisers (RIAs) could self-report and correct previous failures to disclose the selection of mutual fund share classes that paid a Rule 12b-1 fee (i.e., revenue sharing) when a lower-cost share class for the same fund was available to clients. Now the other shoe has dropped and the SEC is making good on its pledge to investigate firms that did not self-report potential 12b-1 fee disclosure violations but which it believes may have made such errors.

According to the SEC’s latest order, RBC failed to disclose that it would receive greater compensation from the eligible customers’ purchases of the more expensive share classes.

“Eligible customers did not have sufficient information to understand that RBC had a conflict of interest resulting from compensation it received for selling the more expensive share classes,” the order states. “Specifically, RBC recommended and sold these eligible customers Class A shares with an up-front sales charge, or Class B or Class C shares with a back-end contingent deferred sales charge (CDSC).”

As the SEC explains, CDSCs are basically deferred sales charges the purchaser pays if the purchaser sells the shares during a specified time period following the purchase.

“These eligible customers were eligible to purchase load-waived Class A and/or no-load Class R shares,” the order states. “RBC omitted material information concerning its compensation when it recommended the more expensive share classes. RBC also did not disclose that the purchase of the more expensive share classes would negatively impact the overall return on the eligible customers’ investments, in light of the different fee structures for the different fund share classes.”

In making those recommendations of more expensive share classes while omitting material facts, RBC violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, the SEC says.

“These provisions prohibit, respectively, in the offer or sale of securities, obtaining money or property by means of an omission to state a material fact necessary to make statements made not misleading, and engaging in a course of business which operates as a fraud or deceit on the purchaser,” the order states.

The terms of the order dictate that RBC shall pay disgorgement, prejudgment interest and a civil monetary penalty totaling $3,889,007. Of that amount, the firm shall pay disgorgement of $2,607,676 and prejudgment interest of $631,331. The remaining $650,000 is being assessed as a civil monetary penalty.

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