Gen Z Employees Show Affinity for Increased Personalization in TDFs

Young 401(k) participants were the most likely to share personal information to help tailor their retirement investments to their needs and goals, according to new Cerulli data.

Updated with correction.

As young 401(k) investors show the most willingness of all generations to share personal data, compared new
Cerulli research suggests that Generation Z employees are in the driver’s seat when it comes to demand for more tailored retirement investments. 

Nearly half of Gen Z survey respondents in “The Cerulli Edge—U.S. Retirement Edition” said they are “very comfortable” sharing their current and/or projected spending plans with their 401(k) providers. 

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The Cerulli report argued that greater personalization allows 401(k) participants’ retirement assets to “become more dynamic over time” and helps meet the unique long-term investing goals of individual investors.  

Creating an inefficient portfolio at a young age can lead to delaying full retirement by a few years, adjusting withdrawal amounts once retired or making drastic changes to asset allocations after the fact, Cerulli argued. 

Sharing information like health and family history data with recordkeepers can “better calibrate the ratio of stocks to bonds to cash/cash equivalents and other asset classes” in a retirement account, according to the report, and can ultimately help participants better plan for when they want to retire.  

More so than other generations, Gen Z participants were willing to share information like smoking status, expected retirement age, current and/or projected spending and nonretirement savings and account balances.  

Information like a participant’s health status can prompt a change in asset allocations. For example, if a participant’s health status changes from “good” to “poor,” it may warrant a shift to a more conservative asset allocation—especially if that change in health results in early retirement or an earlier need for investment income. 

Meanwhile, many target-date-fund managers are starting to prioritize customization in their TDF offerings, as 10% of managers currently offer customization to 401(k) participants, and another 40% plan to include customization in the next year.  

Cerulli also found that 45% of TDF managers surveyed already allow participants to transition from a TDF to a managed account at a specific threshold, such as age or account balance. A recent NEPC survey found that while 43% of plans offer managed accounts and fees have come down by about 20% to 40% over the second half of 2023, only 5% of participants use the accounts.  

A plurality of fund managers that Cerulli surveyed (47%) said a leading benefit of personalized TDFs is the ability to help participants achieve more appropriate risk profiles, and 42% said participants like the idea of having a solution customized to their circumstances.  

As TDFs remain the preferred qualified default investment alternatives for most plan sponsors, with assets reaching $3 trillion in 2023, the Cerulli report argued that asset managers and recordkeepers should capitalize on this upward trajectory by incorporating more personalization.  

HBCU Employees Lag Behind in Retirement Assets

Due to lower levels of participation and contributions, conservative investing and retirement plan leakage, employees at historically Black colleges and universities struggle with lower balances, according to TIAA.

Retirement readiness is often a top concern for higher education plan sponsors, but employees at historically Black colleges and universities face distinct challenges when it comes to preparing for retirement.

A new research study conducted by the TIAA Institute concluded that lower participation rates in supplemental retirement savings plans, lower average contribution amounts, conservative investment allocations and an increased number of plan loans have resulted in lower plan balances for HBCU employees.

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According to TIAA, the historic focus and mission of HBCUs is to educate Black Americans. In 2021, the 99 four-year HBCUs educated 287,000 students, 75% of whom were Black. A majority of HBCU employees are also Black, and 75% are non-white.

Using administrative data from 2022, TIAA compared participants at HBCUs to those at all four-year colleges and universities, as well as those at a “peer group” of institutions.

Low Participation, Contribution Levels

Typically, full-time higher education employees have access to both a primary and supplemental workplace retirement plan—the primary usually funded by employer contributions, occasionally augmented by employee contributions, and the secondary allowing employees to voluntary contribute.

At public institutions, higher education employees often have the option to also participate in either a primary defined benefit plan or a primary defined contribution plan.

TIAA found that HBCU employees at private institutions are significantly more likely to contribute to both types of plans, compared with HBCU participants at public institutions. Among all groups, public HBCU participants are least likely to contribute to both plans, with only about one in eight making a supplemental plan contribution.

The reasons for these differences include differences in employer contribution rates, pay differentials and employee liquidity constraints, TIAA cited.

In addition, when comparing HBCUs to non-HBCU peer institutions, mean contributions were 16% smaller ($1,400) at private schools and 30% smaller ($3,100) at public schools. However, for public institutions, the difference between participants at HBCUs and at peer institutions was driven almost entirely by greater employer contributions ($2,300 more) and not employee contributions ($139 more).

Shelly-Ann Eweka, senior director of research and strategic program initiatives at the TIAA Institute, says plan sponsors can help improve engagement by ensuring that employees have access to financial advisers to improve their financial literacy.

“Two great places to really improve that engagement is [communicate with] new hires right when [they are] onboarded,” Eweka says. “[Plan sponsors should] make sure they’re taking advantage of that onboarding opportunity to get those new hires engaged in not just participating in the plan, but [also] taking advantage of advice sessions and open enrollment. Those two time periods are the periods where plan sponsors can really emphasize taking advantage of and increasing their contributions.”

Conservative Investment Allocations

As with most participants contributing to a workplace plan, a majority of HBCU employees are invested in target-date funds and, for the most part, set their contribution allocation once and never change it, according to TIAA.

Overall, HBCU employees tended to have greater asset allocations to TDFs, compared with other higher education employees.

However, looking at non-TDF allocations, TIAA found that HBCU participants have 54% of their remaining portfolio in equities, compared with 68% of other higher education employees.

“Because low equity exposure can inhibit long-term cumulative returns and reduce assets available at retirement, the strong uptake of TDFs by newer HBCU participants may provide better retirement outcomes relative to longer-tenured HBCU participants,” the report stated.

The report also showed that HBCU participants were more likely to seek retirement income advice than investment advice.

“It could be for many reasons,” Eweka says. “Considering they do have lower accumulations, they have a good understanding of longevity literacy and know that they need to get that retirement income for themselves.”

Retirement Plan Leakage

While taking out a loan from a retirement plan provides a certain amount of liquidity to participants, allowing a participant to borrow a fraction of their accumulated balance and then repay the loan over a specified time and interest rate can be damaging to one’s retirement security.

“[Taking out a loan] absolutely can impact your savings, because that money has to be paid back, and that comes out of your paycheck,” Eweka says. “The [contributions] are after-tax, and then [if] you take the money out again, later on in life, and you’re taxed again on it. … So it can impact your long-term, overall financial health and wellness.”

Eweka adds that emergency savings accounts can make a significant difference in preventing employees from drawing their retirement accounts down early.

TIAA found that about one in eight HBCU participants had an outstanding loan between 2021 and 2022, and this was twice as likely as all other non-HBCU participants and those at peer institutions.

However, HBCU borrowers took out significantly smaller loan amounts in dollar terms, with the average loan being 13%, or $1,992, lower than loans taken out by non-HBCU employees.

Still, for those with at least 25 years of participation with TIAA, balances for HBCU participants are approximately 30% smaller at each percentile than those of peer institution counterparts.

The TIAA report suggested that continued innovation in workplace plans, such as incorporating emergency savings accounts through payroll deductions or adding guaranteed income products and personalized financial advice, could improve retirement outcomes for HBCU workers.

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