Through the Ages

Art by Melinda Beck

Advisers and plan sponsors are often encouraged to “create a plan that works for the company demographics.” That type of language appears in provider pitches as a way to tout the availability of plan-data evaluation.

Creating an optimal plan for a client’s whole workforce might be easier said than done, though, as four generations may be on staff.

Each generation has specific financial needs and challenges; each will require advisers and plan sponsors to make use of different aspects of plan design and benefits programs, experts say.

The latest entrant to the workforce, with the oldest cohorts only 24, is Generation Z, for which just thinking about finances causes stress, according to a study by Harland Clarke, a customer engagement provider. Many of them grew up during the Great Recession of 2008, the study points out.

On the other end of the spectrum, while the oldest Baby Boomers have been retired for a decade, the youngest still have work years ahead. This means there are important conversations to be had with plan sponsors about helping this cohort.

We spoke to industry experts to explore the financial challenges of each generation and how advisers can select retirement plan features to help workers at all stages of life be ready when retirement comes. —PA

Generation Z

Financial Challenges

As the youngest segment of the workforce, Generation Z is already making strides toward building a retirement nest egg and overall financial well-being.

According to a Betterment for Business study, 71% of these workers do not feel too young to begin saving for retirement, and 88% actively save on a monthly basis—including into their retirement plan account. Additionally, 73% contribute at least 3% of their salary to their plan account, with 23% saving more than 8% of their monthly salary.

Workers in this age group are already contemplating their long-term savings growth, says a Center for Generational Kinetics (CGK) survey. Twenty-eight percent of Gen Z respondents said they plan to work in some capacity after retirement, and 52% said they will use personal savings to finance retirement. Thirty-five percent of those not yet saving said they plan to do so in their 20s.

Still, despite their success at saving so far, 77% said thinking about finances causes them stress, the CGK study found.

Besides these worries, Gen Zers have soaring credit card and student loan debt. Seventy-five percent of participants in the Betterment for Business study reported credit card debt, while almost one in three said they owe more than $5,000. Nearly half (47%) of the respondents in the study have student loan debt.

To cope with their debt, some Gen Zers have dipped into their retirement savings, Betterment for Business says. Thirty-eight percent reported tapping their retirement plan for an unexpected medical cost, while 23% said they did so to fund a travel/leisure activity.

Effective Plan Design Elements to Improve Outcomes

Steve Vernon, a research scholar at the Stanford Center on Longevity, says financial advisers should urge Gen Zers to focus on current responsibilities—encourage them to allocate toward paying off debt and saving for emergency expenses before stressing retirement saving. “You have to look at what the needs are for people in their 20s and really just starting to get established in life,” he says. “Once you have that lens, ask yourself, what are all the ways you may be able to help?”

Vernon says he has noticed a trend toward sidecar savings accounts and basic financial wellness programs covering, for example, responsible uses of credit and the basics of budgeting.

For Gen Zers who want to compound their retirement savings, applying automatic enrollment and escalation to the retirement plan is one way to help. Betterment for Business found that 75% of Gen Zers currently maximize their company’s match, and 50% have upped their monthly contribution over the past year.

As the work world shifts toward next-generation technology, leveraging digital advice and platforms can help keep Gen Zers informed and engaged. Consider recommending budgeting apps to track expenses, or emergency savings accounts to encourage supplemental savings. A Morningstar study found that most Gen Zers use at least one financial app for budgeting, investing or everyday banking, and most workers log into these apps every day.

Millennials

Financial Challenges

As the largest and fastest growing segment of the workforce, Millennials are categorized as driven and achievement-oriented. Yet, many in this generation are experiencing growing financial insecurity due to major market downturns.

While Millennial workers are, in fact, saving toward their retirement, a 2017 Wells Fargo Advisors study found this group to be cautious of riskier investments. Experts warn that avoiding such investments or investing conservatively can potentially prevent the saver from meeting retirement goals.

Adding to Millennials’ uncertainty are a host of competing financial demands, including caregiving expenses, student loan debt and mortgage payments or rent, says Lori Lucas, president and CEO of the Employee Benefit Research Institute (EBRI), in Washington, D.C. Millennials—the oldest being 40—are establishing families and caring for parents while continuing to owe.

“Millennials demonstrated that they do take saving seriously. They’re benefiting from their savings vehicles, but they also have a lot more competing concerns than other generations do,” Lucas says.

Experiencing these concerns all at once affects how individuals save. Even as Millennials allocate a portion of their income toward retirement, they lag behind what other generations had saved by this stage of life, says Wells Fargo Advisors.

Memories of downturns, and the market volatility caused by COVID-19, have increased the group’s worries. An Edelman Financial Engines survey found Millennials have faced greater stress than have other generations during the pandemic, as many had just begun their financial recovery from 2008’s recession.

Effective Plan Design Elements to Improve Outcomes

Millennials can profit from key plan design features such as automatic enrollment and benefits such as flexible leave policies and reimbursement accounts for child care, says Steve Vernon of the Stanford Center for Longevity.

A Purdue University study found this group to be especially drawn to employers with a good work-life balance and flexible schedule.

“Offer a referral service to employees and a flexible leave policy that allows people to take care of their caregiving needs,” Vernon says. He also recommends that financial advisers suggest life insurance and disability plans for Millennial workers.

Debt management advice is another essential tool for financial advisers to utilize, according to Lucas. Encourage plan sponsors to offer workshops and educational materials on managing debt, and/or to provide a student loan debt repayment feature, she adds.

Moreover, Millennial workers tend to be receptive to advice. An SHRM study reported that this age group is more likely to ask for mentors (42%) or training (35%) than the preceding generations.

The costs of the pandemic have highlighted the need for emergency savings accounts—especially for Millennial employees, says Vernon. He urges advisers to recommend that tool to increase these workers’ security and build financial well-being, while reducing their temptation to tap their retirement plan.

Generation X

Financial Challenges

The latest “sandwich generation,” Generation X, juggles a list of priorities—and experts worry that this group is placing retirement saving last.

From managing household expenses to caretaking elderly parents and/or children, many Gen X workers struggle to even own an individual retirement account (IRA). A 2016 Employee Benefit Research Institute (EBRI) study comparing financial status across Gen X families found that 66.9% own assets in a retirement plan, whereas 71.5% of Baby Boomers had assets in a plan at the same age.

According to EBRI’s Lori Lucas, Gen X was less likely to be offered the retirement savings vehicles that have benefited the Baby Boom and Millennial generations. While some Boomers had access to a pension plan, these were being phased out as Gen X joined the workforce. On the other end, the Pension Protection Act (PPA)’s endorsement of automatic enrollment in 401(k)s did not occur until 2006, so Gen Xers missed the savings boost that Millennials got as they started their careers. Without either supplement to saving, many Gen Xers lag behind.

Now, as these workers face anticipated retirement in the next 10 to 15 years, more are longing to catch up on savings. “It becomes more real to Gen Xers who are having kids start to move out of the house, and are just now focusing on retirement,” notes Steve Vernon of the Stanford Center on Longevity.

Effective Plan Design Elements to Improve Outcomes

Targeted financial advice, with a tailored, detailed plan for designing a budget, projecting expenses and investing for retirement are essential for this age cohort, says Vernon. “The decisions that people make once they’re older have higher stakes, so that requires personalized advice.” As this group nears traditional retirement age, its members will be more apt to engage in discussions about planning and expectations, he says.

“Historically, financial well-being was exclusively viewed as helping workers save for retirement,” says Lucas. “But now it’s helping people with many of the rest of their financial wellness needs—such as saving and paying down student loan debt—and ensuring that a financial wellness program is available.”

Other benefits, including flexible work arrangements, allow Gen Xers to do their job remotely while caring for a child or parent and continue to save for their future.

According to a survey by the Society for Human Resource Management, Gen Xers (39%) are more apt to request flexible work hours than are other age groups.

Further research, compiled by Purdue University Global, concurs that flexible work arrangements are valued by these employees.

Encouraging the use of catch-up contributions when Gen Xers turn 50 may also help them reach viable savings, notes a Wells Fargo Advisors study on generational strategies.

Adding life or disability insurance benefits for those with young children, providing education on debt management, and re-enrolling older participants are additional options to help Gen X prepare for retirement, experts say.

Baby Boomers

Financial Challenges

As members of essentially the oldest working generation, Baby Boomers confront an array of choices as they head toward and into their post-work years, says Steve Vernon with the Stanford Center on Longevity. “The decisions they face as they transition into retirement are complex, and they have higher stakes than the saving and investment decisions along one’s career,” he explains.

Aside from worrying about replacing income and their current standard of living, more Boomers are reaching retirement with debt, says Lori Lucas of the Employee Benefit Research Institute (EBRI).

According to a Pew Research Center study, Boomers carry an average household debt of $272,849.

This upends savings, especially as 46% of this group reported accruing less than needed for retirement, an EBRI survey found. “Only 36% of retirees said they believe they’ve saved the right amount,” Lucas says. “Closer to 50% said it was less than what they needed. Baby Boomers are more apt to have credit card debt, housing debt, all kinds of debt that prior generations of retirees were less likely to have—the whole financial picture is different for [them] coming in,” she says.

Boomers say they will need to work longer to pay off debt, yet research shows they do not. A Pew Research Center study found that, instead of working to their full retirement age, many are leaving the workforce due to layoffs or fears brought on by COVID-19, or caregiving needs.

Effective Plan Design Elements to Improve Outcomes

Financial advisers who work with this demographic can offer solutions to prepare and ease the retirement journey for near retirees. Offering an in-plan retirement income menu organizes assets and elevates the defined contribution (DC) plan from a savings plan into a true retirement vehicle, says Vernon. According to the Stanford Center on Longevity, in collaboration with the Society of Actuaries, retirement income solutions that use institutional pricing can grow retirement income by 10% to 20% compared with other retail solutions.

Vernon says, “A 401(k) is a great savings plan, but until participants have a retirement income menu and communications, it’s not a retirement plan.”

Building a retirement income menu and tracking different savings strategies may lead participants to decisions that will free up other sources of money.

Convincing your sponsor clients to include installment payments in their DC plan will allow for participants to strategize how to best draw down their money and receive their Social Security at the highest rate. One such strategy is a “Social Security bridge.” A 65-year-old retiree would delay Social Security benefits until 70 to receive the maximum benefit and instead collect regular distributions from his 401(k) for those five years.

Another way to arrange for installment payments is through an annuity bidding service.

The sponsor subscribes to a service that bids out, at a participant’s request, an out-of-plan annuity to a handful of insurance companies and grabs the best deal. “That’s a great way for a plan to offer annuities without getting into all the quagmires that annuities seem to have,” Vernon notes.