Younger, Newer Employees the Plan Participation Challenge

Millennials continue to be the big challenge for retirement plan participation, Wells Fargo Institutional Retirement and Trust finds.

Wells Fargo’s quarterly analysis of key trends among the 4 million eligible employees for whom it provides an employer-sponsored 401(k) plan shows about one-third (34%) of Millennial workers participate in their 401(k) plans on average. However, this number jumps up to 70% for Millennials who are automatically enrolled in their 401(k) plans.

“As evidenced by the difference in participation for Millennials in plans with auto enrollment versus those in plans without auto enrollment, where they had to opt in to the plan, automatic enrollment can be very effective in getting people into the plan,” Joe Ready, director of Wells Fargo Institutional Retirement and Trust, tells PLANADVISER. “Education and communication campaigns are also essential—and for the younger groups, this involves more than just the traditional print mailer.”

In addition, although participation is improving a bit among employees with one to four years of service, new hires are actually losing ground. Only 22% of people hired in the past year are participating in their workplace retirement plan.

Participation is improving for those who earn at least $40,000 per year. Less than half (48%) of workers earning $20,000 to $39,000 are participating, compared with just more than half a year ago.  Only 17% of those earning less than $20,000 are participating, compared with 22% a year ago.

There is good news, however, as younger and newer employees who are participating in their 401(k) plans are saving at better levels and are more diversified in their investments. Wells Fargo’s recommended contribution index, which measures how many people are saving a minimum target of 10% in their 401(k) plan, including employer match, is up 1.4 percentage points, which is noticeably better than the modest gains in prior years (0.6 percentage points in 2013 Q1, 0.5 percentage points in 2012 Q1).

All generations except the Silent Generation have seen at least a four-percentage-point increase in Contribution Index over the past three years. Additionally, the Contribution Index has improved three percentage points among new hires over the past three years, and now stands at 24%. Those hired one to two years ago have seen an improvement of four percentage points—with 30% saving at a minimum target of 10%.

“I am encouraged by the uptick in participants [with contributions of at least] 10%, including employer match,” Ready says. “It’s not enough to just get in the plan; people need to save adequately, also.”

The number of participants meeting a minimum level of diversification—either a minimum of two equities and a fixed fund or an asset allocation fund such as a target-date fund, and less than 20% in employer stock—in their 401(k) account is up two percentage points this year. Wells Fargo says the big driver is the growing use of managed products; 74% of participants now have at least part of their balance in a managed investment product, up from 65% three years ago.

According to the study, among generations, Millennials are still the most diversified. By tenure, new hires continue to be the most diversified, but there has been no change in that group over the past three years. The biggest gains are among those with three to nine years of tenure, who have seen a jump of 10 percentage points over the past three years. This correlates with the wave of plans that adopted managed investment products as their default investment in the wake of the 2006 Pension Protection Act, Wells Fargo says.

By salary, diversification is highest among the lowest earners: 82% for those earning less than $20,000. The other salary groups are clustered tightly, ranging from 75% to 77%.

The analysis also finds loan usage has leveled off, but still more than 19% of participants have an outstanding loan.