Better wealth-building behaviors: Gen Z is killing it when it comes to 401(k) savings

Automatic enrollment and target-date funds are reshaping the retirement planning landscape for all workers but especially younger ones.

Generational differences have had a significant impact on retirement saving participation. Baby boomers were the first generation with access to defined contribution retirement plans throughout a meaningful part of their careers. Millennials were the first generation to have access to automatic enrollment and automatic investment solutions in DC plans during their early working years.

Vanguard recently researched generational changes in 401(k) behavior. Among the key findings:

• The overall participation rate of employees increased from 62% in 2006 to 82% in 2021, largely because more plans have adopted automatic enrollment. Generation Z’s participation rate was more than twice as high as similarly aged employees in 2006.
• Overall, eligible employees deferred nearly 40% more in 2021 than in 2006. Employees across all generations saved more in 2021.
• Professionally managed allocations (via target-date funds) and advice have significantly improved age-appropriate equity allocations for all generations. In 2006, nearly one-quarter of participants ages 18 to 24 had no equity exposure. In 2021, 97% of automatically enrolled Generation Z participants had an equity allocation between 41% and 99%.

“This research shows us that the rising adoption of auto enrollment and target date funds have been huge innovators in retirement wealth accumulation across all generations, but especially for younger participants,” said Dave Stinnett, head of strategic retirement consulting for Vanguard. “Automatic enrollment, combined with target date fund adoption, has played a significant role in altering retirement savings behavior for the better. Today’s Gen Z employees save more than twice as much, as a percentage of pay, when compared to young employees in 2006, and millennials save 65% more. This is helpful in showing how behaviors have changed, largely through auto enrollment designs.”

The research confirmed trends that Vanguard already had seen.

Related: Putting 401(k)s on autopilot: Take plan design to the next level in 2023

“We believe in the power of automatic features to combat participant inertia and were not surprised that these plan components have played a role in wealth accumulation, age-appropriate equity allocations and participation rates among all generations,” he said. “Plan sponsors continue to make strides in the right direction, crafting strong plan designs that are helping more of their participants save. Millennials, for example, have worked through two large equity bear markets, yet their allocation to equities was significantly higher in 2021 than in 2006.”

Stinnett encourages employers and advisors to integrate this information into their plan design strategy.

“Plan sponsors have the opportunity to implement smart plan designs to keep participants on the road to retirement readiness through automatic features, advice options and target date funds as QDIA,” Stinnett said. “More so, plan sponsors can take plan design to the next level and consider implementing automatic enrollment with automatic annual increases, defaulting participants at 6% or more. Other recent research suggests that modest increases in participant deferral rates over time would enable an additional 20% of participants to attain a 75% replacement ratio in retirement.”