Auto Features Put Millennials on Path to Retirement Readiness

Millennials saving for retirement are bucking reports of savings insufficiency and equity aversion, according to a white paper published by Vanguard researchers.

“The auto savings generation: Steering millennials to better retirement outcomes” finds that participation rates, saving rates, and equity allocations for Millennial participants (ages 18 to 34) have been on the upswing over the last decade in defined contribution (DC) plans. Vanguard attributes the advent of automatic plan design features and the increasing adoption of target-date funds for putting Millennials on the right path to retirement readiness.                             

Millennials’ participation in 401(k) plans in 2013 was higher than that of the equivalent age cohort in 2003, in large part driven by automatic enrollment plan design. In Vanguard plans with an automatic enrollment feature, 87% of Millennials participated in their workplace retirement plan—an increase of more than 70% compared with 10 years prior. Vanguard notes that Millennial investors are the first generation with access to automatic plan features from the beginning of their working years.

Vanguard reported an improvement in total saving rates across all generational cohorts in 2013, with Millennial investors demonstrating the strongest gains. The average Millennial 401(k) deferral rate was 3.6% in voluntary enrollment plans and 4.2% in automatic enrollment plans—a jump from the 3.1% average contribution rate in 2003 for individuals ages 18 to 34. In plans that offer a company match, average total contribution rates for Millennials climbed to 5.1% in voluntary enrollment plans and 6.6% in automatic enrollment plans in 2013—up from a 4.2% average contribution rate for individuals ages 18 to 34 in 2003.

Vanguard says automatic escalation savings features are likely influencing the improvement in savings rates for Millennials. Many Vanguard plan sponsors have introduced this option as a complement to automatic enrollment, with 70% of plans offering both features as a default. In automatic enrollment plans, nearly two-thirds of Millennials were also enrolled in an automatic increase feature. However, even in voluntary enrollment plans, Millennial participants were more likely to sign up for automatic annual deferral increases.                  

Despite experiencing two significant bear markets during their lifetimes, Millennials’ equity allocations also increased over the 10-year period Vanguard analyzed. Median equity allocations rose to 89% in 2013, up from 82% in 2003, primarily due to climbing adoption of target-date funds. Vanguard data shows target-date fund usage has increased dramatically over the last decade. In 2013, 64% of Millennials in automatic enrollment plans invested in a single target-date fund, in addition to 23% in voluntary plans.

In addition, the study found Millennials were more than twice as likely as Baby Boomers to invest in an all-in-one investment option (e.g. a target-date, target-risk, or traditional balanced fund).

“Automatic plan design features and the rise of target-date funds are reshaping retirement plan outcomes for all generations,” says Jean Young, author of the paper and a senior research analyst with the Vanguard Center for Retirement Research. “However, these innovations are by far having the greatest—and most positive—impact on the retirement savings of Millennials.”