Auto enroll 401(k)s a boon for millennials
Automation helping those who are leery of the stock market.
Much has been made about the effect that the 2007-09 bear market has had on the investing habits of today’s 20-somethings. The theory goes that coming of age during a severe market downturn will put you off stocks, and the risks they entail, for good.
But a recent study by the Vanguard Center for Retirement Research finds that technology can help us overcome past experiences.
According to the report, the median allocation millennials had in stocks in 2003 was 82 percent. In 2013, the allocation actually increased to 89 percent.
Millennials are defined as those 18 to 34. Vanguard’s study was based on 393 employer-sponsored retirement plans that were available in 2003 and 2013, and encompasses as many as 1 million plan-eligible employees.
So what happened? According to Vanguard, the answer is automation.
In 2003, less than 1 percent of the plans in Vanguard’s study offered automatic enrollment, a feature in which employees are automatically enrolled in their workplace retirement plan, no signing up required.
A decade later, the figure had jumped to 40 percent.
On top of that, more young people are now taking advantage of all-in-one funds, like target-date funds, that hold a balance of stocks, bonds and other investments.
As the author of the Vanguard study, Jean Young, noted in the report, “millennials are more risk-averse than both Gen Xers and late boomers.” But, she added, “The data suggest that automatic enrollment and the rise of target-date funds have played substantial roles in changing saving and investment behavior.”
What if you’re automatically enrolled in your employer’s retirement plan? Here’s what you can expect.
The Vanguard study found that the typical default contribution rate for those who are automatically enrolled in a workplace retirement plan is 3 percent.
While that’s better than not participating at all in your 401(k), it’s a long way from the 10 percent or more that most financial advisers suggest putting away for retirement each year.
The good news is that the majority of 401(k)s with auto enrollment also have an auto-increase feature for contributions.
In fact, according to Vanguard, 70 percent of auto-enroll plans automatically raise workers’ contribution rates annually.
By starting to save early in your 401(k) you get to take advantage of any matching contributions from your employer.