Headlines often laud the millennial generation's propensity to stash away money for long-term goals, but when recent research has looked more deeply at how millennials save, it seems that they’re eschewing tax-deferred retirement plans and investing in favor of holding their assets in savings accounts as cash.
That may be because 401(k) plans don’t appeal to millennial needs, says Kevin Boyles, senior vice president at Dresher, Pa.-based Ascensus, a provider of retirement, educational and health saings plans.
“Of course it’s dangerous to generalize 70 million to 90 million people, but all of the data that I’ve seen shows that millennial savers are better than any other generation post Great Depression,” Boyles says. “Incentive to save isn’t the problem, it’s incentive to invest and an investment vehicle that meets their needs.”
Boyles says that for younger, low-asset millennials entering the workforce, a Roth IRA can double as a long-term retirement account and a medium-term rainy day fund.
“The Roth gives an opportunity for these younger, lower-income millennials to plant a seed right out of college,” Boyles says. “There’s also am opportunity for advisors who want to talk to these people while they have relatively few assets and small needs , a chance to capture a growing demographic segment that stands to inherit $40 trillion in wealth over the next few decades.”
A recent Bankrate.com report showed that almost 40 percent of those under 30 choose cash as their preferred way to save money they won’t need for at least ten years, while additional research from TD Ameritrade found that 47 percent of millennial respondents believed a savings account was the best way to prepare for retirement.
According to the 2015 Generational Research Report, a collection of data from El Segundo, Calif.-based researcher Financial Finesse, millennials were the least likely of all generations in the U.S. workforce to contribute to a workplace retirement plan, and their participation rate is declining. In 2015, 34 percent of younger millennial workers aged 21 to 27 reported participating in a defined contribution plan, down from a 40 percent participation rate in 2015.
That decline may be because many millennials now entering the workforce are self-employed or working as contract employees, says Boyles.
“Consider that millennials are the most entrepreneurial generation that we’ve seen for some time, even those who aren’t necessarily starting their own businesses are still working for themselves,” Boyles says. “We estimate that somewhere around 24 percent of millennials are non-W-2 workers. A lot of them are in Silicon Valley. So right of the bat, one-in-four millennials don’t have access to an employer retirement plan.”
Younger workers’ longer time horizon means that they face more potential contingencies that might require emergency savings, says Boyles, so some are delaying contributing to retirement accounts to build up their rainy-day funds. Millennials, generally more likely to move between geographic locations or employers than older generations, also need their accounts to be liquid and mobile.
“Millennials, and younger people in general, is that they crave flexibility,” Boyles says. “They simply don’t spend as much time at jobs or in any one place as older generations, they’re more inclined to shift jobs or move.”
The advantages of 401(k) plans simply don’t appeal to younger millennials, Boyles says, noting they usually don’t have incomes high enough to need the tax benefits, they rarely stay in a job long enough to guarantee their employer match, and they’re not able to save enough on an annual basis to need the 401(k)’s high contribution limits.
Boyles believes that millennials are already turning towards Roth IRAs as their savings vehicle of choice, citing recent research from the Investment Company Institute.
“The ICI recently put something out that said among the 4 million to 5 million IRAs they’re tracking, 20 percent are owned by millennials,” Boyles says. “They’re creating the flexibility on their own to use the money as they need to and to invest in whatever funds and products they want.”
Boyles says that millennials should be encouraged to open up Roth IRA accounts after they graduate from college in their early 20s. After a five year period, any earnings on money deposited in the IRA could be withdrawn.
“After five years, at the age of 25 or 27, if they need the money for something like a first time home purchase or for a rainy day, the earnings can come out tax-free,” Boyles says. “The earnings are incredibly mobile, the money is always accessible, and they can use it whenever they want to. It’s not unlike 529s where families save for education in a non-tax deferred vehicle, except a Roth has fewer limitations.”
As their income rises and their wanderlust subsides with age, millennials could then be encouraged to participate in a 401(k) plan and focus more directly on qualified retirement savings to keep their tax burdens low, Boyles says.
The ‘rainy day Roth’ concept wouldn’t be as appropriate for high-net worth or high income clients, says Boyles, and brings with it the risk that millennials would begin to use the account for discretionary expenses.
“You’re gambling on their mindset,” Boyles says. “You’re hoping that they’re going to be careful about how they use these accounts. There’s always a certain population that is going to see that Roth IRA as their spending money. This is a short-term solution that carries the risk that millennials will borrow from their future.”
Thus, if advisors choose to offer a ‘rainy day Roth’ to young clients, they should also emphasize the benefits of the 401(k), Boyles says.
“I don’t think we should preach the mantra that people should get away from their 401(k) entirely,” Boyles says. “Employer matches are still free money that millennials should take advantage of, if possible, but I do think that we should consider why so many people are choosing on their own to eschew 401(k) plans altogether. This is already happening, in particular among mid-range millennials between the ages of 22 and 30.”