www.calamos.com Retirement Solutions Engaging the Next Generations in Retirement Savings Improving Retirement Readiness for the Next Generations by Applying Behavioral Finance & Thoughtful Plan Design Most experts agree that Americans are not saving enough to generate the income they will need in retirement. The current retirement savings deficit is estimated to be as high as $4.3 trillion. 1 Reducing that deficit is no small task, especially for the younger generations, commonly known as Gen X (born 1965-1978) and Gen Y (or Millennials, born 1979-1996). 2 Frequent job changes, starter salaries, and competing financial obligations often leave little room for retirement savings. The challenge in addressing the savings deficit is further complicated by the fact that employee education and communications strategies used by plan sponsors and consultants in the past to draw employees into the plan are not likely to resonate with Gen X and Gen Y. Plan sponsors who commit the time and resources to work with plan consultants who understand Gen X and Gen Y expectations and priorities can adopt strategies to communicate the importance of retirement savings in a way that is meaningful to Gen X and Gen Y and may be in a better position to help these generations of workers save for retirement. This whitepaper identifies some distinguishing characteristics of Gen X and Gen Y and suggests strategies that plan sponsors may want to adopt to engage younger workers in retirement savings today so they can achieve retirement readiness in the years to come.
Comparing Generational Characteristics Understanding how each generation views the world and what motivates them is critical to communicating a retirement savings message that resonates with them. GENERATION X GENERATION Y (MILLENNIALS) ERA Born 1965-1978 Born 1979-1996 COMMON CHARACTERISTICS Grew up with working parents: self-reliant, skeptical pragmatists Grew up with technology: networked, fast-paced & educated MOTIVATORS Growing knowledge & avoiding conflict Doing things their way & making an impact WORK EXPECTATIONS LIFE GOALS THREATS TO FINANCIAL SECURITY IN RETIREMENT Focuses on financial aspects of a job; appreciates flexible work schedule Finding a work/life balance between career, family & friends Potentially paying more in taxes than they will receive in entitlement benefits 3 ; More likely to experience downward mobility in retirement 4 ; less time to make up for a shortcoming in savings Seeks meaning in work; prefers to be measured by productivity vs. hours worked or office time Living life on their own terms & making a difference Potential loss of entitlement benefits; few defined benefit plan opportunities; longest lifespan of any generation; highest level of student debt; will need to save the most & the longest COMPETING FINANCIAL PRIORITIES Balancing mortgages, debt reduction, childcare, health insurance, life insurance, college funds, retirement savings, & daily needs & wants; many were hit hard by the Great Recession some losing nearly 45% of their wealth 4 ; only 24% say saving for retirement is their greatest financial priority right now 2 Managing cash flow and paying off student debt; better savers than Gen X but the need to build an emergency fund, manage debt, & save for major purchases (e.g., car or home) often takes precedence over saving for a far-away retirement Understanding The Retirement Savings Challenges The Employee Benefit Research Institute (EBRI) 2012 Retirement Security Projection Model found that 44% of Generation X s simulated life paths were projected to lack adequate retirement income for basic retirement expenses and uninsured health care costs. 1 In addition to the competing financial priorities discussed earlier, some of the factors that may be contributing to the savings deficit include: Low Savings Rate Over 70% of workers age 20 39 who are offered a retirement plan at work participate in that plan, but more than one-third of those workers are not saving at a high enough rate to receive the full company match. 5 Short Job Tenure Those who receive employer contributions may not be working with the employer long enough to vest 100% in those contributions; the median tenure of younger workers (age 25 34) is just 3 years. 6 Leaving an employer s service also results in the opportunity to distribute the retirement account. 2
»Leakage» The temptation to cash out a seemingly insignificant account balance and defaulted plan loans are eating away at already-too-small nest eggs. With frequent job hopping and low savings rates, workers are not accumulating sufficient savings.»lack» of Knowledge Many of these individuals don t understand how much they need to save. Approximately 1 in 10 Gen X and Gen Y workers surveyed report having used a retirement calculator or worksheet to estimate how much they will need to save for retirement. 2 Despite these challenges, reducing the savings deficit is critical for plan sponsors. A healthy business requires a skilled and engaged workforce. When employees remain in the workforce beyond traditional retirement ages, the insufficient turnover of older workers may leave little room for new talent and skill sets. Aging workers that remain in the workforce simply because they cannot afford to retire may lead to decreased productivity and higher health care costs that are often associated with aging workers. Identifying Solutions The good news is that plan sponsors and plan consultants can have a big impact on helping workers achieve their retirement readiness goals. Unlike prior generations, Gen X and Gen Y expect most of their retirement income to come from retirement accounts and they value retirement benefits provided at work. 2 More than 80% of workers age 18 49 are concerned that Social Security will not be available for them when they are ready to retire and expect to rely on 401(k) plans (or similar types of retirement plans) as their primary source of income in retirement. 2 More than 80% of workers age 18 49 are concerned that Social Security will not be available for them when they are ready to retire and expect to rely on 401(k) plans (or similar types of retirement plans) as their primary source of income in retirement. 2 Two-thirds of Gen Y say they would be likely to switch employers for a similar job if it came with better retirement benefits. 2 The challenge is getting younger workers to participate and save at a meaningful rate. Two strategies for driving stronger savings among Gen X and Gen Y are 1) more focused education and communications and 2) adopting plan features that are appealing to young savers. 1. Focused Communications Building education and retirement savings messaging with an understanding of generational characteristics and perceptions regarding retirement may be more effective in guiding Gen X and Gen Y toward more positive retirement savings outcomes. 3
To help bridge the gap between financial concerns today and planning for a faroff retirement, some plan sponsors and consultants have expanded their retirement savings communications to include education on day-to-day financial topics. Perceptions & Messaging Broaden the Conversation Retirement is still many years away for most of Gen X and Y. Talking to them solely about retirement may have them paying more attention to their smart phones than their savings rate. Yet 73% of Gen Y and 65% of Gen X surveyed indicated they would like more education and advice from their employers on how to reach their retirement goals. 2 To help bridge the gap between financial concerns today and planning for a faroff retirement, some plan sponsors and consultants have expanded their retirement savings communications to include education on day-to-day financial topics. Speaking to what matters to participants today can help them learn the value of working toward tangible financial goals. As participants begin to analyze strategies to achieve short term goals, such as those listed below, they may begin to appreciate how changes in savings habits today can significantly affect their lifestyle in retirement. Evaluating credit card rewards programs Renting vs. buying Paying off student loans and credit card debt Developing a travel budget Saving to buy a house Take it a Month at a Time Most workers budget on a monthly basis (e.g., utility bills, mortgage or rent payments, loan payments). Identifying how much they will have to spend each month in retirement may help them visualize an otherwise abstract concept. Provide resources to help them calculate how much their current account balance or their projected balance (based on current contribution rates) will produce as a monthly paycheck in retirement Project how different monthly contribution amounts today can affect that paycheck in the future, rather than projecting a total retirement savings dollar amount Challenge employees to evaluate how they can build various retirement contribution rates into their monthly budget 4
Means of Delivering Communications and Education Multi-channel interactions are essential for communicating with younger generations. Plan sponsors and consultants targeting the younger generations may want to consider some of the following: Web-based projection tools and calculators that allow individuals to do their own research when it s convenient for them Email and text messaging Website content that is short and interactive E-newsletters or articles that provide guidance on specific financial topics rather than generic information they can easily find on any public website Mobile device applications for managing their account, considered helpful by 71% of Gen Y 2 Videos and multi-media presentations that can be viewed from a computer, tablet, or smartphone Virtual meetings, using web-based tools, accessible from home or a virtual office (e.g., on the road) PLAN FEATURE AUTOMATIC ENROLLMENT POSITIVE IMPACT ON GEN X & GEN Y Make it quick and easy to enroll in the plan by automatically enrolling participants in the plan. The EBRI Retirement Security Projection Model found that the most recent at-risk levels of participants not having enough retirement savings are 5 8 percentage points lower than what was found in 2003, largely due to the growing adoption of automatic enrollment. 1 Another study found that plan sponsors overall satisfaction with the automatic enrollment feature was 97%, due to its positive impact on plan participation rate, participant awareness, and average contribution rate. 7 AUTOMATIC ESCALATION DESIGNATED ROTH ACCOUNTS Although helpful for getting participants into the plan, the automatic enrollment feature is often established with a default deferral percentage too low to meet participants retirement savings needs. One study found that 72% of plans with automatic enrollment set their default percentages at 3% or less. 7 An automatic escalation feature presets a participant s deferral rate to increase each year, without any action required by the plan participant unless they want to opt out of the automatic increase. Designated Roth accounts allow participants to set aside money for retirement on after-tax basis, with the potential for tax-free distributions of earnings. This tax incentive can especially be beneficial to young workers because of their long savings horizon to accrue investment earnings and the expectation that tax rates may be higher in the future. MATCHING CONTRIBUTIONS Matching contributions have been shown to increase participation and contribution rates. Generation Y employees whose employer offered a matching contribution were found to participate at an 80% rate vs. 65% for those who were not offered a match. Similarly, the average deferral rate was 10% when a match was provided vs. 5% when there was no match. 2 FLEXIBLE PORTABILITY OPTIONS Gen X and Gen Y are likely to work for many different employers plans that accept rollovers enable individuals to consolidate multiple retirement savings accounts and may help prevent leakage. 5
2. Evaluating Retirement Plan Features for Gen X & Gen Y Given the unique characteristics of Gen X and Gen Y, certain plan features, such as those in the chart on page 5, may help drive higher participation and savings rates. Plan consultants can help plan sponsors analyze the impact of plan features on the plan sponsor s employee demographic. Summary Most Gen X and Gen Y workers are aware that they need to save for retirement, but saving enough is a big challenge for these generations a challenge that also presents risks for businesses. Plan sponsors who commit the time and resources to work with plan consultants who understand Gen X and Gen Y expectations and priorities can adopt strategies to communicate the importance of retirement savings in a way that is meaningful to Gen X and Gen Y, and align the retirement plan features to fit the needs and preferences of these next generations. 6
Engaging the Next Generations: Plan Assessment Do you offer the education and communication strategies and plan features aligned with the savings needs of Gen X and Gen Y clients? The following checklist identifies some of the strategies that are aligned with the unique perspective of Gen X and Gen Y workers. Use this checklist to identify some of the issues plan sponsors and plan consultants may want to discuss to help the next generation of workers achieve retirement readiness. GEN X/GEN Y SAVINGS NEEDS COMMUNICATIONS & EDUCATION BROAD RANGE OF FINANCIAL EDUCATION TOPICS Evaluating credit card rewards programs Developing a travel budget Paying off student loans & credit card debt Saving to buy a house Weighing benefits of renting vs. buying MONTHLY BUDGET MESSAGING MULTI-CHANNEL COMMUNICATIONS Resources to help calculate how much a current account balance or a projected balance (based on current contribution rate) will produce as a monthly paycheck in retirement Tools to project how different contribution rates can affect the monthly paycheck in retirement Education to help employees evaluate how to build various contribution rates into their monthly budget Web-based projection tools & calculators that allow individuals to conduct their own research Email & text messaging Website content that is short & interactive E-newsletters or articles that provide guidance on specific financial topics Mobile device applications for managing retirement accounts Videos & multi-media presentations accessible from a computer, tablet, or smartphone Virtual meetings using web-based tools PLAN FEATURES AUTOMATIC ENROLLMENT Provides quick & easy entry into retirement savings without requiring action by employee Can establish a default deferral rate that produces meaningful retirement savings AUTOMATIC ESCALATION Easy system for automatically increasing a participant s deferral rate each year Allows participants to opt out of the automatic increase May be used both for automatically enrolled participants & participants who affirmatively opt in to the plan DESIGNATED ROTH CONTRIBUTIONS & IN-PLAN ROLLOVER FEATURE MATCHING CONTRIBUTIONS FLEXIBLE PORTABILITY OPTIONS Provides the option to set aside after-tax money for retirement, with the potential for tax-free distributions of earnings Provides the option to convert pre-tax assets in the plan to Roth status Analysis of percentage of employees who contribute enough to receive the full matching contribution Evaluation of eligibility criteria & vesting schedule Projections regarding impact of changing the matching schedule (e.g., requiring a higher level of participant contributions to qualify for the maximum matching contribution) Accepting rollovers into the plan from other employer plans enables individuals who change jobs to consolidate assets 7
1 Employee Benefit Research Institute (EBRI), Retirement Income Adequacy for Boomers and GenXers: Evidence from the 2012 EBRI Retirement Security Projection Model, Vol. 33 No. 5, May 2012 2 Transamerica Center for Retirement Studies 15th Annual Transamerica Retirement Survey of Workers, July/August 2014 3 Financial Finesse Reports, 2013 Generational Research, 2013 4 The Pew Charitable Trusts Economic Mobility Project, Retirement Security Across Generations: Are Americans Prepared for Their Golden Years, May 2013 5 Aon Hewitt, News Releases Leaving Matching Contributions on the Table Can Cost Young Workers in Retirement, November 17, 2014 6 U.S. Bureau of Labor Statistics, Employee Tenure Summary, September 18, 2014 7 Deloitte, Annual Defined Contribution Benchmarking Survey, 2013-2014 Edition Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Calamos Advisors LLC 2020 Calamos Court Naperville, IL 60563-2787 800.582.6959 www.calamos.com caminfo@calamos.com 2015 Calamos Investments LLC. All Rights Reserved. Calamos and Calamos Investments are registered trademarks of Calamos Investments LLC. GENXYCOM 5060 0115O R