Simply put, many workers in their 20s and 30s are not saving enough of their own salary to receive the full company match for their retirement account contributions—potentially leaving thousands of dollars on the table and negatively impacting their long-term financial health.
Aon Hewitt’s analysis of more than 3.5 million employees eligible for defined contribution plans shows that, while the average participation rate of workers age 20 to 29 is a strong 73%, nearly four in 10 are saving at a level that is below the full company match threshold. The numbers improve somewhat moving up the age scale, with 31% of workers age 30 to 39 saving below the full match level.
“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,” notes Rob Austin, director of retirement research at Aon Hewitt. “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 receive the full employer matching contributions that are offered.”
Leaving matching contributions on the table can cost young workers a significant amount of long-term savings, Aon Hewitt finds. The firm points to a theoretical 25-year-old worker making $30,000 annually, working for an employer that provides “a typical company match” of $1-for-$1, up to 6%. If this individual starts saving the full match amount of 6% immediately upon employment and continues to do so until reaching age 65, he could have more than $950,000 saved in the 401(k).
If the same worker waits until age 30 to begin saving 6%, he will have less than $715,000 saved at age 65. In other words, Aon Hewitt says five years of missed contributions will cost about $225,000 over a career. In order to make up the gap, an individual would need to increase savings by an additional 4% and start saving 10% of pay each year for the next 35 years. And even that might not be enough, as the figures assume a relatively generous 2% pay growth and a 7% annual return on invested assets.
“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,” Austin explains.
Austin suggests 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,” he adds, “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.”
Aon Hewitt observes that many Millennials are using premixed target-date, target-risk, and diversified funds, and are therefore more heavily invested in equities than older workers. Workers age 20 to 29 have 83% of their balance allocated to equities, while those age 30 to 39 have 76% of their exposure to equities.
“Younger workers benefit from having a longer time horizon in which to invest and therefore can take more risk with their investments,” Austin concludes. “It is also not surprising to see so many Millennials using premixed funds since they are the default investment portfolio for the majority of plans.”