How Gen Z Suddenly Became a Big Contributor to 401(k) Savings
Written by
Heather Taylor
Edited by
Chris Cluff
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Gen Z workers have made massive gains when it comes to contributing to their 401(k) plans.
Findings from an April 2023 Vanguard research paper show overall participation has significantly increased in employer-sponsored 401(k) plans. According to Vanguard’s study, 62% of employees participated in 2006, but the percentage jumped to 82% as of 2021.
Gen Z was a big reason for that; the younger generation’s participation rate is now twice as high as it was with similarly aged employees in 2006 — up to 62% in 2021, vs. 30% in 2006. What is encouraging Gen Z to make a concentrated effort in contributing to these enrollment plans? How can other generations who may be behind on their 401(k)s catch up?
Why Gen Z Is Prioritizing 401(k) Plans
There are a few educated guesses as to why Gen Z suddenly won’t leave money on the table when it comes to 401(k) contributions. Some arguments include external factors such as Gen Z’s increasing financial literacy and desire to avoid money struggles that have thwarted the financial futures of previous generations.
The real reason behind Gen Z’s active participation in defined contribution retirement plans is in their automatic design.
Defined contribution plans are a fairly new concept. The first generation to access them were baby boomers. Millennials were the first generation to access automatic enrollment and automatic investment solutions. The more plans adopt automatic enrollment, the greater Gen Z’s participation.
Brian Walsh, CFP at SoFi, said the findings from Vanguard speak to the incredible advancements in designing employer-sponsored retirement plans. Research has shown for more than a decade the critical role retirement plan designs have in the actions of employees. Walsh said the industry learned from this research and began limiting investment options, increasing the adoption of automatic enrollment and simplifying investment decisions with default options.
“By automatically enrolling employees into saving for retirement, inertia works for the employee rather than against them,” Walsh said. “With so much going on, the simple act of getting started or making a change comes down to just remembering to do it.”
How Can Other Generations Catch Up?
Other generations are in the 80% range for contributions, but here is what the remaining 20% or so can do to get their 401(k) savings on track and take advantage of compound interest.
Automate It
Taking the first action, Walsh said, is the hardest part of getting your finances on the right path. However, once someone does it they will immediately see and understand the benefits.
Older generations who are not already enrolled in employer-sponsored 401(k) plans should enroll and automate their contributions. Entering a “set it and forget it” mindset is important because automating small actions makes progress toward goals.
As you continue automating your finances, Walsh said, you’ll see these little actions snowball into major changes. Your account balance will grow larger over time and the little bit of extra money gone from your paycheck will not be missed as much.
Take Advantage of Catch-Up Contributions
What can Gen Xers do to get ahead with their 401(k) plans if they find themselves behind? Andrew Meadows, SVP of Ubiquity Retirement + Savings, recommends Gen Xers over age 50 start taking advantage of catch-up contributions.
People over 50 can add an additional $7,500 to their annual contributions.
Continue Taking Retirement Savings Cues from Gen Z
Millennials and Gen Xers are well-advised to keep following in the footsteps of Gen Z saving habits. In addition to increasing 401(k) contributions, they should take advantage of any employer matches offered and consider opening Roth 401(k)s.
What else should you focus on with your finances? Everyone’s financial story is different, and Gabe Krajicek, CEO of Kasasa, recommends each generation seek financial advice from a professional as they prioritize their financial stability and long-term savings.
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