Millennials are not saving enough to take full advantage of their employer’s 401(k) company match, but benefit advisers say there are many tools employers can use to turn this trend around and engage the younger generation.

While the average 401(k) participation rate for millennials is a respectable 73% for workers 20-29 and 77% for those aged 30 to 39, many are saving at a low rate, according to a new Aon Hewitt analysis of more than 3.5 million employees eligible for defined contribution plans. Nearly 40% of 20-29 year olds and 31% of 30-39 year olds are saving at a level that is below the company match threshold.

Leaving matching contributions on the table can cost young workers a significant amount of long-term savings, but benefit advisers can approach employers with several tools that have proven successful at engaging employees.

"Automatic enrollment has significantly improved participation in 401(k) plans for all employees over the past 10 years — but even more so for young workers," says Rob Austin, director of retirement research at Aon Hewitt. "However, once they're in the plan, young workers seem to fall victim to inertia with many continuing to save only at the default rate, or slightly above, and risking their long-term savings by not receiving the full employer matching contributions that are offered."

Barbara Delaney, founder and principal at StoneStreet Advisor Group in Pearl River, N.Y., agrees, saying, “Automatic enrollment has worked very well for younger folks.”

But she adds, there’s quite a bit that advisers can do to improve the savings rate of these younger employees as well, including increasing the default enrollment amount and implementing automatic increases.

“We’ve recently changed a group from a 3% enrollment amount to a 6% and we’ve gotten no push back on that number,” she says.

“We just re-enrolled a T.V. network here in New York, including 1,289 employees that were not previously enrolled due to an acquisition. We re-enrolled them at 6% and that’s the company match. We did this in July and only two employees have opted out.”

She said her firm’s experience with opt-out for auto-escalation is even lower.

“People just tend to stay,” she adds.

The tech generation

Advisers and employers can use technology specifically to target millennials, she says, noting that some plans are changing their website landing pages to focus employee attention on how much income they’ll have at retirement age based on their current savings rate, rather than focusing on their current account balance.

Online tools also can be used to compare for millennial employees their current savings to other individuals their age. “Once millennials do get that feeling of saving, it becomes competitive,” says Delaney.

When one worker sees that somebody else who’s 22 has saved $30,000 and they have not, it’s a motivator to start saving more, she says, adding that this sort of gaming strategy can be important for motivating millennials who are typically more concerned with imminent needs than long-term goals such as retirement.

"For young workers, it may seem insignificant to increase 401(k) contributions by a few percentage points — particularly at a point in their career and life when they're likely earning a smaller salary — but the long-term effects can be remarkable," adds Austin. "Employers can help millennials improve their financial outlook by encouraging them to save at least at the match threshold through targeted communications and online tools and resources.”

“The bottom line is young workers need to save more, starting now," he says.

Financial constraints

Still MD Sam Smith, an adviser with Genesis Financial & Insurance Services says the issue of saving for retirement and the participation by millennials is a complicated one.

“From a financial planning standpoint, we obviously counsel our clients to maximize their company match first and then stretch their family budget to maximize their overall contribution,” he says. “However, the reality isn’t as simple as it used to be.”

The ability of millennials to save can be impacted by such factors as college tuition debt and daily living and housing expenses.

“In Los Angeles, it is not unusual to see housing costs take up 50-55% of an individual’s budget,” says Smith.  “These figures used to be 25-30%.”

“It’s not like these families are choosing between a steak dinner out and eating at home,” he adds. “They have to choose between paying the rent and living in their car.”

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