Aon Hewitt reports a significant factor for the financial shortfall is this generation's savings and financial habits. Only half of Generation Y workers who are eligible to participate in a defined contribution plan do so. Among those who do save, the average before-tax contribution rate is only 5.3 percent of pay, with 41 percent of workers not saving enough to receive the entire employer-provided match.

Furthermore, even when members of this generation do save, nearly 60 percent cash out their retirement savings when changing jobs.

"Younger workers will have fewer future benefits from their employers and potentially the government. They need to save a third more in their defined contribution plans than workers who are nearing retirement today, but there's clearly a lack of urgency to proactively save," said Pamela Hess, director of Retirement Research at Aon Hewitt. "Employers can play a critical role in helping this generation of workers by being thoughtful about offering participants the help they need to get on the right track. Automated tools with more robust defaults, innovative matches, investment advice and personalized messaging leveraging innovative technology are effective ways to start and keep these younger workers on the right path."

Impact of automation on saving and investing behaviors

Participation rates of Gen Y workers who were automatically enrolled were 85 percent in 2009 compared to just 42 percent under traditional enrollment. These workers were also more likely to use contribution escalation features, which enable participants to increase their contribution levels over time – almost 25 percent of Gen Y workers elected or were defaulted into contribution escalation when available in their employer's defined contribution plan, compared to just 10 percent of younger baby boomers.

Generation Y participants use simplified investment solutions more often and are more likely to use them correctly. This is primarily because of the growing popularity of premixed portfolios as the default investment under automatic enrollment.

"Generation Y workers now have more diversified portfolios than other generations largely because of default behavior," noted Hess. "An increasing number of younger workers are automatically enrolled in their defined contribution plans and defaulted into a target-date portfolio. These funds are improving diversification and rebalancing, which have greatly helped defined contribution investors in recent years."

Reasons for shortfalls:

• Rising health care costs
• Increased life expectancy
• Emergence of defined contribution plans as the primary retirement savings vehicle for most Americans.
• Saving and investing habits (a significant factor, according to Aon Hewitt)

Steps employers can take:

• Adopting and/or enhancing automated tools and defaults.
• Acknowledging differences in learning styles and needs across generations.
• Designing innovative employer matching contributions.
• Offering more robust investment help and advice.
• Adopt a Roth.

Employee defined contribution saving and investing behaviors by generation