Young Plan Participants Expect to Rely on Personal Retirement Accounts

Millennial 401(k) participants do not believe they can count on Social Security or guaranteed income sources.

Younger 401(k) participants are not counting on Social Security or other guaranteed income sources to support them in retirement. Instead, they plan to depend primarily on their personal retirement accounts, which signals a need for changes in defined contribution plan design before younger generations retire, according to Cerulli Associate’s “U.S. Retirement Edition: The DC Advice & Income Solutions Issue.”

Responding about their expected primary source of retirement income, 58% of Millennial 401(k) participants cited personal retirement accounts, while just 6% pointed to Social Security. By contrast, 39% of Generation X 401(k) participants expected personal retirement accounts to be their main income source, with 30% relying on Social Security.

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Furthermore, Millennial 401(k) participants reported prioritizing a personalized retirement income plan, with 27% considering it the most important attribute of their retirement savings. Meanwhile, 24% of Generation X participants nearing retirement reported interest in a tailored retirement income plan. Additionally, 20% said they would like a guarantee that they will still receive monthly payments, even if their assets run out.

“Yes, certainly confidence in Social Security declines with younger generations, leaving most Millennials saying they expect to primarily rely on their personal retirement accounts for income in retirement,” says Elizabeth Chiffer, a research analyst at Cerulli, via email.

She reports plan advisers play a key role in participant education and financial wellness on important topics like retirement income, pointing to evidence from Cerulli’s 2023 survey of retirement specialist advisers—those with at least 50% of their practice assets under administration held in employer-sponsored retirement plans.

“Forty-three percent of retirement specialist advisers believe providing financial wellness, participant communication and education is one of the most valuable services they provide to DC plan sponsor clients,” she says.

Today’s Retirees

According to Chiffer, DC plan participants must be more engaged with the retirement savings process to ensure they are saving enough and have a plan for distributions in retirement, unlike those with guaranteed sources of income from a defined benefit plan.

Current retirees depend more on guaranteed income sources, such as Social Security and pensions. Among retired 401(k) participants, 56% reported Social Security as their main source of income. Just 7% of current retirees reported using personal retirement accounts as their main source of income, though those with higher household investable assets are more likely to do so. Additionally, 4% of retirees cited annuities as their primary income source.

Among retirees who identified Social Security as their main source of income, 14% reported it as their sole source of retirement income. Only 13% of retirees named their defined benefit pension as their primary income source, while 20% of those relying on Social Security said their pension serves as a secondary income source.

‘Expanding ESOPs’ Coalition Aims to Increase Awareness

The new group intends to improve wealth-building opportunities for American workers.

A coalition of more than 50 major foundations, financial institutions, advisory firms, law firms and advocacy groups launched the Expanding ESOPs initiative on Tuesday, intended to promote wider adoption of employee stock ownership plans.

The initiative aims to enhance the current ESOP model and make it both simpler and more accessible to businesses of all sizes and from all industries.

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“Employee ownership gives workers a stake in their companies and a seat at the table,” Pete Stavros, the organization’s head and the co-head of global private equity at private equity firm KKR, said in a statement. “Polling clearly shows that Americans across the political spectrum want to see workers participate in company ownership to a far greater extent, and ESOPs represent our best shot of achieving that goal.”

The group, in particular, aims to increase the prevalence of partial ESOPs, which take a minority interest in the business.

“Expanding ESOPs aims to reverse the decline in partial ESOPs while maintaining 100% ESOPs in their current form,” the group wrote in a statement.

James Bonham, president and CEO of the ESOP Association, in a July 1 article titled “What Private Equity Gets Right, and Wrong, About Employee Ownership,” wrote that the new group is “is seeking federal legislative and regulatory changes that would provide incentives for PE firms to offer equity stakes in more of their acquisitions, especially larger companies.”

Bonham wrote that the new group “does make a few compelling arguments,” but, he wrote, “there is genuine and legitimate cause for concern with some of the proposed ideas being advanced by the Expanding ESOPs coalition. First, their new version of ‘ESOPs’ is not employee ownership, no matter how much they may want to ride on our coattails. It’s more like profit sharing, and it’s conditional on the business being sold for a large enough profit and on employees working for the company at the time of sale.”

A traditional ESOP is a program that gives employees ownership interest in the company. Through an ESOP, a company sets up a trust fund and allocates shares to employees based on factors like salary or tenure.

Employees earn company shares as part of their benefits. The shares vest over time, and employees gain full ownership once they meet specific requirements. Upon leaving or retiring, they can sell the shares back to the company. ESOPs offer tax advantages to both companies and employees and are often used for succession planning and employee retention.

ESOPs were established under federal law in 1974 with the passage of the Employee Retirement Income Security Act. Currently, about 250 new ESOPs are formed each year, primarily among smaller businesses. Only about 4% of companies with newly created ESOPs have more than 500 employees. Additionally, these plans are concentrated in a few industries, with 75% of new ESOPs found in the industrial and service sectors.

“ESOPs have been around a long time, and they are an incredible wealth creation tool for workers who have been able to participate, but we simply haven’t had enough of them,” Corey Rosen, founder of the nonprofit National Center for Employee Ownership, said in a statement. “ESOP participants and their families have 92% greater net household wealth than those without comparable benefits.”

As part of its announcement, Expanding ESOPs launched a website to educate the public and policymakers about the organization and its goals.

At an April conference, Employee Benefits Security Administration Head Lisa Gomez said the Department of Labor is working on a proposal regarding adequate appraisal of the value of shares in ESOP plans, as many of the companies that issue shares to their employees as part of this type of qualified retirement plan only have a very small public market, if any at all.

Section 346 of the SECURE 2.0 Act of 2022, known as the WORK [Worker Ownership, Readiness, and Knowledge] Act, mandated that the DOL issue regulations in this area to establish legal certainty. ESOP adequate consideration appeared in the DOL’s Fall 2023 regulatory agenda.

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