Generational Shifts: Auto Enrollment As the Retirement Safety Net of Gen Y

This was the clearest version of a unanimous solution among five panelists at PLANSPONSOR magazine’s Plan Designs 2006 conference in Chicago this week.

Each of the panelists provided their assessments of the generation, whose members have not reached 30, with their conclusions resembling a virtual Venn diagram.

The logic: This next generation of retirees is debt-ridden and will live and work longer then those before it. They are not taking hold of their retirement futures, and in many cases, not even considering it. This is a generation bombarded with options about how to spend their money. And employers must embrace that these “Echo Boomers,” or “Millennials” have a different behavior about retirement that begs an alternative approach to prepare them.

“The mindset of Generation Y is that not only is retirement not on the radar, but they do not even think it needs to be,” said Lori Lucas, Director of Participant Behavior Research at Hewitt Associates, one of the panelists at the conference.

Lucas said Hewitt’s own research found this generation is already showing signs of indifference toward retirement. A little more than one third (35.9%) of Generation Y is funneling money into 401(k) plans when employers offer them, compared to 65.6% of Generation X and 74.1% of Baby Boomers.

The median 401(k) balance of this generation is $1,570 – a figure that Lucas says belies this group’s confidence that they will be ready for retirement. “The challenge will be to get Gen Y to use DC plans, if they will use them at all.”

Lucas said that behavioral shifts for this generation toward savings have stalled their concern about retirement and have fostered the position that this generation is different from previous generations. She said the stigma of bankruptcy has disappeared, removing the consequence of spending.

This attitude fosters a mindset that “spending wildly is a virtue,” and “frugality, a vice,” said Lucas.

This calls for a difference approach to making them think about retirement – one that keeps their gravitation toward instant gratification. The 401(k) match allows this generation of workers to see money in the 401(k) plans ballooning, whereas Baby Boomers waited until retirement, said Catherine Collinson, Senior Vice President of Strategic Planning at Transamerica Retirement Services and one of the five panelists.

Collinson added that Generation Y has become a “debt generation” created by the onslaught of credit card access and not enough knowledge of retirement. She suggests an industry-wide effort to “get financial literacy in high schools and colleges.”

Panelist Brian Perlman, partner and CFO, at Greenwald Research offers another reason for Gen Y’s indifference toward retirement.

“Peoples’ feelings on retirement are based on the people that are already living retirement. So until the upcoming generation of retirees sees the current one’s eating dog food, they are not going to worry,” Perlman said.

Perlman said that digging this generation out of careless retirement will require education that makes them understand the immediacy of a danger that seems so distant.

“They don’t realize the realities of retirement or how long it will last,” Perlman said.

Another barrier that Generation Y must overcome, which was not present before, is that the real wages have declined, said panelist Tom Swain, FSE, Principal at Wells Fargo Benefits Consulting. He said credit card debt is not unique to this generation, but a big question is whether they will be able to maintain the same standard of living as previous retiring generations.

The definition of retirement is also changing. It is no longer considered an abrupt stopping point, but more of a process. Even Baby Boomers have embraced this “new retirement,” or phased retirement, in which people continue working even after the retirement age, according to Stephen Mitchell, Director of Merrill Lynch Retirement Group.