Gen Z wants to save for retirement: Here’s how to help

The young workers of Gen Z, born between 1997 and 2012 and comprising about a fifth of the U.S. population, are just entering the workforce, arriving with unique perspectives on work and what they want out of it. Smart employers are listening and changing how they approach recruiting and retaining this diverse, talented, educated and socially responsible generation.

In what remains a strong economy and tight job market, Gen Z has more opportunities than their predecessors, and they have the digital skills to dig deep into companies. They want meaningful work with a sense of autonomy, flexibility and work-life balance. And more so than the generations before them, Gen Z is less afraid to ask for what they want and more willing to look elsewhere for better benefits.

Employers are responding by taking a hard look at their investments in comprehensive health and wellness benefits that address physical and mental wellbeing, spending and saving optimization, financial and retirement readiness and occupational and workplace satisfaction. Supporting overall employee wellness leads to an increased sense of wellbeing and job satisfaction, key elements in retention and recruitment, regardless of what generation we are talking about.

Interestingly, leading edge Gen Z’ers, barely in their 20s, say retirement benefits are of great value, with 85% telling a Harris Poll that retirement benefits will be a key factor the next time they go job-hunting.

A Vanguard report released this spring said they already have greater access to employer-sponsored retirement plans than earlier generations, and with automatic enrollment now common, they are 32% more likely to invest in their workplace retirement plan than their older colleagues. The 2022 BlackRock Read on Retirement says that on average, they invest 14% of their income toward retirement, two percentage points higher than other generations, and they start saving at an earlier age.

But a 401(k) does not necessarily address what will be their biggest expense in retirement, health care, and that is where employers have an opportunity to set themselves apart.

The 2022 Retirement Healthcare Costs Data Report estimated that a couple retiring today will need about $674,000 to cover health care expenses over their remaining years. That figure increases to $1.7 million for a couple in their mid-40s, and by the time Gen Z retires, that figure surely will be far greater.

Health savings accounts, or HSAs, combined with a high-deductible health care plan can help hold down near-term health care costs, which the 2023 HSA Bank Health & Wealth Index indicates is the greatest impediment to participation, while helping employees address what will be their greatest expenditure in retirement. Employers can also positively influence the ability of employees using HSAs to build their balances to be better prepared for retirement.

For example, many employers overlook the option they have to encourage a regular savings habit in HSAs by defaulting employees into making contributions. While they need to ensure that employees maintain their ability to opt out or modify those elections, just as they do with 401(k) contributions, this approach helps set the employees down the road of making regular contributions to build their balance.

However, according to the 2022 Plan Sponsor Council of America survey, only 9.4% of employers currently report that they automatically default employees into making payroll contributions to HSAs. The reason for this low utilization is mostly caused by the lack of knowledge that this is even an option for employers.

Additionally, to further help build up employee balances, and to make health savings accounts even more attractive, employers can design matching strategies that encourage workers to invest in them, while at the same time cutting their costs.

While it is important for employers to make some kind of seed contribution to demonstrate their commitment to the HSA strategy for employees, simply seeding an HSA provides little incentive for the employee to contribute.

To help encourage employees to use their HSAs to go beyond just paying for current qualified out-of-pocket health care expenses, matching contributions are the most powerful lever to influence employee health savings behavior. And because the employee contribution is made through the Cafeteria Plan on a pretax basis, the employer can realize significant payroll tax savings. Matching contributions provide powerful benefits for both the employer and employee, and can often be facilitated by making simple adjustments to their current structure.

To put this into real numbers, consider an employer making a seed contribution of $500 to their employees’ HSAs. In many cases, that is likely the only funding amount going to the account until the next employer contribution.

However, if the employer takes that same $500 and seeds the account with $200 and then matches the employee contribution one-for-one up to $300, it represents the same $500 employer contribution amount, but the employee will have $800 going into the account should they elect to take advantage of the matching funds. Structuring the match at 50 cents for every dollar the employee puts in up to that original $500, the employee would end up with $1,700.

Related: Retirement readiness: 7 in 10 employers taking steps to help navigate the transition

By reallocating the expenditure, the employer empowers employees to take charge of their health care savings by offering them a higher perceived value for the high-deductible health plan and helps them build for the future. In addition, any funds contributed by the employee through the Cafeteria Plan provide a sizeable payroll tax savings to the employer. Today, we see Gen Z workers looking to embrace these types of encouragement from their employers, it is more important than ever for employers to consider.

It is understood that Gen Z workers will change jobs several times over their careers for any number of reasons. But an employer offering an HSA with a strong matching strategy that improves employees’ retirement readiness will be better able to compete for their services.