Workers under the age of 35, the generation most likely to depend almost solely on defined-contribution plans rather than the typical Social Security-savings-pension three-legged model, need to be diligent if they expect to save enough for retirement, a report released in October by Northern Trust found.
“Sponsors have to engage younger workers to save, save a lot, and to continue saving,” Lee Freitag (left), product manager of defined contribution solutions for Northern Trust, told AdvisorOne on Monday. To that end, sponsors need to limit loans to prevent leakage. Educating workers to avoid taking loans from their retirement plans is a “smart thing to do.”
The report, “The Path Forward,” was conducted by Greenwich Associates and is part of a research series on defined-contribution plans. Greenwich Associates interviewed 45 plan sponsors representing 1.5 million participants and over $175 billion in assets.
The report found that most plan sponsors agree the primary objective of a DC plan is to help employees save for retirement, but acknowledges that much of the industry’s focus in the past 10 years has been on baby boomers.
While about 60% of sponsors say they are confident that their clients’ plans will prepare them for retirement, less than half of DC plan consultants surveyed agreed. One reason for that, the report found, is that most plan sponsors have never set specific goals for different age groups in their plans. Setting goals and targeting different age groups is a “critical step” in increasing plan effectiveness, the report found. Younger investors, though, have three characteristics that make creating a targeted plan difficult:
- Young investors lack discipline and often keep low savings rates
- They have difficulty staying engaged with a savings plan over a long period of time
- They lack a basic understanding of investing
Furthermore, young investors are more likely to cash out a retirement plan when changing jobs.
The younger generation may not have suffered as much in the recession as older workers who saw their retirement savings evaporate just a few years before they expected to retire, but they haven’t come out unscathed. The report notes that unemployment rates for young Americans are at historic highs, and plan sponsors reported difficulty convincing young workers to save for retirement when they may be suffering more immediate cash needs.