The Path Forward: Engaging Younger Employees

Until now, defined contribution (DC) plan sponsors have focused on the Baby Boom generation – and with good reason. But as that 75 million-strong age group moves into retirement, plan sponsors need to shift their attention to the challenges of engaging employees younger than 35 years old.

According to the U.S. Census Bureau, there are approximately 61.5 million adults who are under 35 – and that's just too large of a group to ignore.

True, some plan sponsors have had success with tools such as auto enrollment and auto escalation, but these tactics need to be more widely implemented. Additional action, such as tailored communication programs and tighter conditions on plan loans and withdrawals, also need to be incorporated into plan design.

These are some of the findings of the 2011 installment of Northern Trust's DC plan research series, The Path Forward. The results of this year's survey, Engaging the Younger Employee in DC Plan Participation, underscore the importance of reaching the younger generations.

"The majority of this age group will not benefit from participation in a defined benefit plan," said Jim Danaher, managing director of the Defined Contribution Solutions Group at Northern Trust. "The importance of this study is that it shows this group – employees younger than 35 – has the most to gain from positive industry developments and the most to lose from inadequate planning and poor investment choices."

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Some Progress Made

The 2011 Path Forward survey found more than eight out of 10 plan sponsors (86%) consider automatic features such as auto-enrollment and auto-escalation to be effective with younger employees.

The problem, however, is these features aren't doing enough to help younger employees adequately invest toward their retirement. The survey found almost half of younger employees (46%) contribute 5% or less of their salaries to their DC plans.

Danaher said part of the problem is the seemingly apathetic approach younger employees take toward retirement planning – but plan sponsors bear some of the responsibility, as well.

"It's the absence of goals and objectives on the part of plan sponsors specifically for this age group that is creating this challenge," he said.

To help fill that void, the Path Forward research identifies 12 action steps spread across near-, medium- and long-term timeframes for plan sponsors to consider. Actions include segmenting plan participants by age groups, reducing plan leakage and further aligning target retirement date funds with participant demographics.

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With Freedom Comes Responsibility

Danaher notes that the shift by employers to DC plans – DC plans represented 57% of total U.S. pension assets in 2010 – gave employees greater control over decisions affecting their retirement planning. But more needs to be done to help participants understand the importance and implications of their actions.

"It's not about saving, it's about investing for retirement," Danaher said. "That means the money needs to stay invested in the plan and should not be eroded through loans, withdrawals and cash-outs. Too often, employees treat their company-sponsored retirement accounts as savings accounts. That's the mindset that needs to change, particularly for this younger group of employees."

For more insights from the 2011 study – and its 2010 companion, The Path Forward: Designing the Ideal Defined Contribution Plan – download a copy of the report from The Path Forward page of our Web site. To learn more about Northern Trust's DC capabilities and tailored solutions, contact the Northern Trust Defined Contribution Solutions Group.

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