Guest Article
Best Practices in Workplace Financial Education for the Millennials
By Liz Davidson, founder and CEO of Financial Finesse.
 Safety nets were added in the Pension Protection Act of 2006 that benefited Generation Y employees-the Millennials. With auto enrollment in 401k plans and the proliferation of target-date funds, Gen Y employees were "steered" toward saving for retirement and investing for the long term. These features were a good starting point, but a safety net can turn into a false sense of security. When these employees simply accepted the default options, they never had to educate themselves on their investment choices or how much they needed to save for a comfortable retirement. However, while coming of age during the financial crisis, they have had to learn valuable day-to-day money management skills that others may have taken for granted. Unfortunately, when it comes to retirement, they may assume that what they are doing is sufficient, and the danger is they won't be prepared when the retirement date comes.
Gen Y employees are saving in their retirement plans, but they don't know if they are on track to retire.
- They aren't giving retirement planning a high enough priority. In our latest study, Gen Y employees ranked retirement as their third priority behind cash flow and debt management. At the same time, a financial planning analysis of their situation revealed their top vulnerability as "not saving enough for retirement," followed by "not having enough savings to cover emergencies" and "serious debt." This research shows Gen Y employees to be too focused on short-term day-to-day financial issues to the detriment of their long-term retirement goals.
- They might not be saving enough. Since many Gen Y employees are entering the workforce for the first time, they are benefiting from features like auto enrollment in their 401k plan. This is a double-edged sword as many auto-enrollment plans are set at a 2% - 6% default contribution level. It is rare to see an auto-enrollment plan with a default contribution level at 10%-a rule of thumb used by financial planners regarding saving for retirement.
- They aren't sure if they are on track for retirement. According to the EBRI 2011 Retirement Confidence Survey, only 32% of workers ages 25-34 have even tried to calculate how much money they will need to save for retirement. This is the lowest percentage of all age groups studied, and well off the 41% reported in 2001. In our own most recent study, only 13% report knowing they are on track to replace 80% of their income in retirement. Gen Y may have gotten off to a good start, but they need to take their retirement planning a step further.
Without a deeper understanding of their investments, they may abandon their strategy in the future.
- Gen Y more than any other age group invests in target-date funds. In fact, they do so at a rate double that of Gen X or Baby Boomers.
Financial Engines & Hewitt, "Help in Defined Contribution Plans: Is it working and for whom?" Jan 2010
- Some Gen Y investors may be mistrustful of the stock market after experiencing a nearly 40% drop shortly after participating in a 401k plan for the first time. Because of this, some Gen Y investors may be investing too conservatively and run the risk of not keeping up with inflation.
- Only 21% of Gen Y employees say they feel confident their assets are invested appropriately, according to our most recent study.
Gen Y is learning how to manage their day-to-day finances since coming of age during the financial crisis.
- Gen Y is making headway in the area of cash management. They scored higher than their older Gen X coworkers on key financial literacy questions that provide the basis for overall financial success. In the first two quarters of 2011, Gen Y continued an early trend toward managing their money better than Gen X.
- The Millennials learned not to count on anything after having made their entry to the financial world during the financial crisis, housing meltdown, and extreme market volatility very early in their careers. That could benefit them in the long run if they translate the financial lessons learned from managing their day-to-day finances during tough times into a long-term outlook in their retirement planning.
This is a promising trend because Gen Y will need to manage their money well. As a generation, they must rely much more heavily on their own retirement funding (including company matching contributions) in defined contribution plans. If anyone can do it, the Gen Y employee can. They have time on their side with 30-40 years to accumulate retirement savings. Since they grew up with the internet and are comfortable with technology, they are adept at tapping into online resources as well as fully utilizing social networking. Employers who understand this generation can have a huge impact on their employees' financial success.
Best Practices in Financial Education for Generation Y Employees
Move them from auto pilot to pilot -
- Build on their strengths. Gen Y learned valuable money management skills during the recession. Help them to build on these by offering education around financial basics such as debt reduction, improving credit, and saving for goals.
- Encourage deeper understanding of how target-date funds and managed accounts work so they don't simply rely on the default option but rather invest with confidence. Offer investing and asset allocation workshops, webcasts, and online tools for them to learn the basics of investing and beyond.
- Make auto escalation the new normal - the most popular choice. Since Gen Y has learned to manage their money better, they will more readily accept small contribution increases that are made regularly. Plan sponsors have done a good job in promoting participation in the plan; accelerate that by promoting the auto escalation feature. Make this a part of every communication across the board. Have forms available after every workshop, show a pop-up box when working in an online learning center, and use tag lines and catchy slogans.
Engage them -
- Use an open platform. Gen Y employees like to see what their peers are saying and doing, so encourage open communication. Give them the ability to review, rate, and comment on all aspects of the financial education. Use testimonials from their peers on topics such as the cost of waiting or the ease of choosing the right mix of investments - peer recommendations are key for Gen Y.
- Use powerful messaging in communications in short, frequent bursts. They may feel the communication doesn't apply to them if it is delivered in a traditional way. They are the originators of Myspace and Facebook, so deliver messages in the format they readily use. Phrase messages in an informal voice for Gen Y such as in blogs and multimedia.
- Appeal to their ambition and gaming skills. They like gaming competition so couple it with their interest in their peers and create campaigns around that. For example, have a contest where they run a retirement readiness assessment that gives them a "score" they can compare against the national average or the average within the company. They want to see how they stack up against the norm. Appeal to their natural ambition and have the top "scorers" share what they are doing to outperform the others in testimonials using podcasts or video blogs.
The Millennials may have gotten a bad rap early on when they were characterized as the group who anticipated job promotions early and often, but after a few hard knocks in the economy, and their own personal finances, this group is emerging as the heroes of the recession. They may still be forever known as "gamers" and be associated with texting and Facebook, but they have shown a resiliency in the face of financial challenges. When they fully understand their need to "pilot" their finances-not just for the short term but for the long term-they may just do what it takes.
This research has been compiled by Financial Finesse's Think Tank of CERTIFIED FINANCIAL PLANNER™ professionals, and Trisha Brambley, President, Retirement PLAYBOOK, Inc. a leading expert in this area. For additional research and best practices on Gen Y and Financial Education, email AskFF@financialfinesse.com. Trisha Brambley can be reached at trishbrambley@gmail.com.
About Financial Finesse
Financial Finesse was founded with a single mission: Provide people with the information they need to become financially independent and secure. Today, we are the leading provider of unbiased financial education for large companies and municipalities. Our financial education services are fully integrated programs designed to address the strategic goals of the organizations we service and are delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals as an employee benefit. If you are interested in learning more about workplace financial education programs, contact one of our education consultants at AskFF@financialfinesse.com.
The Ask Financial Finesse Q&A service is designed to provide general information on trends and developments in workplace financial education programs and participant education strategies. Due to the complex nature of financial benefits and/or workplace financial issues, the information contained in this document is not to be construed as advice.
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