How Two Generations of 20-Somethings Invest Differently for Retirement

Allocations to equity vehicles within their 401(k) accounts differ significantly for 20-something Millennials today as opposed to that of their Generation X counterparts when they were in their 20s, according to a long-term study by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI).

Although the study found that the twenty-something investors at year-end 1996 and those at year-end 2015 had allocated a similar portion of their aggregate assets to overall equities, the mix of vehicles invested in differed significantly. For example, savers in their twenties at the end of 2015 allocated 28% of their aggregate assets to equity funds at year-end 2015. Back in 1996, participants in their twenties allocated 55% to such funds. Furthermore, today’s twenty-somethings are relying less on company stock (5%) than their 1996 counterparts (17%).  

Today’s younger 401(k) participants are investing more heavily in balanced funds, including target-date funds (TDFs). At the end of 2015, participants in their twenties had invested 54% of their assets in balanced funds with much of their assets being driven to TDFs (47%). In 1996, participants in their twenties allocated only 8% of their 401(k) plan assets to balanced funds. However, TDFs were not reported separately in the database before 2006.

“One factor influencing this trend is that today’s younger investors are relying more on the automatic rebalancing feature of target-date funds to keep their assets allocated in an age-appropriate way as they progress through their careers,” says Sarah Holden, ICI’s senior director of retirement and investor research.

Overall equity allocations did not stretch too far apart, however. Participants in their twenties at year-end 2015 had allocated 80% of aggregated assets toward equities. Savers in their twenties at year-end 1996 had allocated 77% toward equities.

The EBRI and ICI find that TDFs in particular continue to gain popularity among all ages, particularly among new hires. The firms’ database shows that investments in TDFs increased in 2015 to 20% of assets, up from 5% at year-end 2006. At year-end 2015, 60% of recently hired participants held TDFs, and these funds accounted for more than one-third of their assets.

“The extensive and unique EBRI/ICI database continues to be extremely valuable, permitting in-depth examination of 401(k) plan participants’ activities,” says Jack VanDerhei, EBRI’s director of research. “Today’s update reveals that 401(k) participants in their twenties are diversifying their 401(k) investments in what many perceive to be an age-appropriate manner. In 2015, only 7% of these young participants had no equity allocation in their 401(k) plans. Moreover, 75% of this group had at least 80% of their 401(k) balances invested in equities in 2015, due in large part to the increased utilization of target-date funds.”

These findings come from a study based on the EBRI/ICI database of employer-sponsored 401(k) plans compiled through a collaborative research project undertaken by the two organizations since 1996. At year-end 2015, the EBRI/ICI database included statistical information on 26.1 million 401(k) plan participants in 101,625 employer-sponsored 401(k) plans, which held $1.9 trillion in assets.

Full results of the annual EBRI/ICI 401(k) database update are posted here on EBRI’s website and here on ICI’s website.