Data & Research October 8, 2015

Auto-Features Put Millennials on Path to Retirement Readiness

Vanguard finds that the recession of 2008/2009 did not derail Millennial retirement savers.
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Millennials saving for retirement are bucking reports of savings insufficiency and equity aversion, according to a 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 to 34) have been on the upswing over the last decade in defined contribution (DC) plans. Vanguard attributes the advent of automatic plan design features and the increasing adoption of target-date funds for putting Millennials on the right path to retirement readiness.

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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 10 years prior. Vanguard notes that Millennial investors are the first generation with access to automatic plan features from the beginning of their working years.

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 ages 18 to 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 ages 18 to 34 in 2003.

NEXT: Target-date funds improve equity allocations

Vanguard says automatic escalation savings features are likely influencing the improvement in savings rates for Millennials. 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 10-year period Vanguard analyzed. Median equity allocations rose to 89% in 2013, up from 82% in 2003, primarily due to climbing adoption of target-date funds. Vanguard data shows 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.

In addition, the study found 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).

“Automatic plan design features and the rise of target-date funds are reshaping retirement plan outcomes for all generations,” says 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.”

In Practice October 8, 2015

Adviser Career Paths Shift With the Times

Most financial advice professionals feel “daunted by the task of forging their own path and the accompanying headaches,” according to research by Cerulli Associates.
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Cerulli Associate’s fourth quarter issue of The Cerulli Edge – Advisor Edition suggests many finance pros simply aren’t interested in creating their own company or gaining greater firm leadership responsibilities.

In fact, Cerulli finds advisers today are far likelier to look to join an existing registered investment adviser (RIA) firm rather than start their own independent practice. Advisers joining established RIAs cite the importance of operational and legal infrastructure, “but also a sense of community.”

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Bing Waldert, a director at Cerulli, says business and regulatory pressures have led to the introduction of a variety of new platforms and organizations capable of supporting independent advisory businesses. In particular, Waldert identifies the “rise of the subaggregator” as an important trend for the financial advice industry. Cerulli is naming this emerging class of firms the subaggregators because their business model in many cases escapes traditional definitions of broker/dealers (B/Ds), RIAs, or offices of supervisory jurisdiction (OSJs).

“They use the platform of a larger firm, such as a B/D or custodian, which more frequently works directly with advisers,” Waldert explains. “These firms support multiple advisory practices, with advisers operating autonomously, often across multiple geographies. They have professional leadership in place. Perhaps most importantly, the adviser’s primary relationship is with the subaggregator rather than the B/D, custodian, or platform.”

NEXT: New model for a new environment 

Waldert says advisers are recognizing this evolution “and believe the rise of subaggregators is the next generation of financial firms.”

Cerulli’s reporting argues the rise of the subaggregator is happening for two reasons: “The first, as has been noted, is providing an option for advisers interested in the independent business model, but without the skills or desire to operate their own business. The second and unique reason for the rise of these firms centers on the culture and community of being part of a smaller organization.”

When considering a new firm to join, Cerulli finds advisers are generally attracted to firms that offer a high level of service and flexibility in terms of how producing advisers choose to conduct business.

“Those who moved within the past three years cite the desire for greater independence as the most important factor influencing their decision to switch firms,” Waldert adds. “By emphasizing the various options available to advisers, headhunters at B/Ds and custodians can foster trust and help steer advisers to the right affiliation model.”

Over time, according to Cerulli, these subaggregator firms will be able to build adviser teams with strong wealth management and institutional asset oversight experience. “Subaggregators need to recruit only a few teams a year to be successful,” Cerulli concludes. “This scale allows them to be more selective, taking advisers with quality business models and the right approach.”

More information about obtaining Cerulli Associates' research reports is available here. 

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