'Y' Not Save?

Members of Generation Y are cashing out their defined-contribution plans when they change jobs rather than rolling them over. Although this generation's heavy credit-card debt and student-loan burden are factors, part of the blame may lie with communication efforts that fail to resonate with these workers.

Saturday, May 1, 2010
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Never before has a population like that known as "Generation Y" appeared in the workforce. Roughly defined as those born between 1980 and 2000, this is the plugged-in generation, raised on the Internet, technologically savvy and incredibly mobile.

But despite their promise, many Gen Y employees risk entering their retirement years as a lost generation, devoid of opportunities, where Social Security is little more than vapor and their own retirement nest egg is a broken shell. The trick to keeping these employees on track is to educate them on the benefits of a long-term view and to consistently communicate with them using the technology they're comfortable with.

According to a recent study by Lincolnshire, Ill.-based Hewitt Associates, the number of workers between the ages of 20 and 29 who cashed out their 401(k) plans when they left their employer was 60 percent. In particular, 85 percent of those with balances under $1,000 in their 401(k)s cashed out, while 40 percent of those with balances between $1,000 and $20,000 cashed out.

Employers are stepping in, trying to educate these workers about the value of taking a long-term view toward retirement -- to invest in a defined-contribution plan and to avoid cashing out when they change jobs. The trick, say some companies, is engaging these employees and keeping them engaged, often by using the technology they're comfortable with.

Pamela Hess, director of retirement research for Hewitt Associates, says these statistics highlight a continuing systemic problem. In a similar study Hewitt conducted five years ago, Hess says, the results showed about the same cash-out rates as the most recent study, which was conducted in late 2009.

"They were still very high five years ago," she says. "It's not any worse, but it's not any better, either."

That sort of continuity bothers Hess, she says, because it suggests a continuing trend for Gen Y employees: Contributing to a defined-contribution plan, then consistently cashing out once they leave an employer, thereby never gaining traction in their retirement savings.

"If you keep doing that over and over again, and if you're mobile and moving every few years, you'll get to retirement and you'll have nothing saved," she says. Those Gen Y employees might not want to count too much on Social Security and pensions being around when they retire in 40 years. The number of companies that offer traditional defined-benefit plans continues to shrink.

Meanwhile, the Congressional Budget Office recently predicted that this year, Social Security will likely pay out more in benefits than it receives through payroll tax income, thanks to the poor economy. That is an important tipping point that the Social Security Administration hadn't expected to occur until 2016, according to its annual report last year. The SSA has also predicted that its fund will run dry by the year 2037, if the system remains unchanged.

Among Hewitt's recommendations for helping to keep Gen Y employees invested in 401(k) plans, Hess says, is for employers and providers to communicate with workers about the long-term effects of cashing out. To help those who terminate their employment, the Hewitt study suggests offering participants different modeling tools that will project the likely outcomes associated with leaving their money in a 401(k), rolling it into an IRA or cashing out completely.

"Some employers are better at encouraging people to stay on the plan, kind of subtly, because it can often be beneficial for employees to stay within the 401(k) plan," says Hess. "We've found that [for] companies that actually retain assets, it lowers the fees for participants for everybody."

But appealing to Gen Y employees, and keeping them engaged, is a challenge for HR. Unlike previous generations, many younger employees are burdened by debt and less interested in details than simply being told their options. They want the answers, they want it to be easy and they want it now.

Ding! You've Got 401(k)

Simplicity is the name of the game if you're going to entice Gen Y, says Jim Saunders, the founder and president of Charlotte, N.C.-based Synapses Inc., which specializes in creating personalized 401(k) education products and services for providers, plan sponsors and financial advisors. Saunders says the age of dense quarterly statements is coming to an end, and it's about time, he adds, because Gen Y workers won't stand for muddling through them.

"Some of these people work for me and they keep telling me, 'We want it boiled down simply,' " says Saunders. "And authenticity is a big thing with them. 'Just show me what's going on, show me what I need to do, and I'll take it from there.' "

Saunders says Gen Y employees carry an inherent mistrust of large financial institutions, believing they're only interested in "trying to trick [them] into giving them more money."

To meet that challenge, Saunders says, Synapses is working on ways to provide 401(k) participants with a simple metric -- a number or a visual cue -- that will tell them whether they're on the right track to financial security. It wouldn't represent a dollar amount, he says, but a metric that would mean nothing except to the participant. Then, it's a matter of communicating that number, anytime, anyplace -- through e-mail, text message or any other form they choose.

Saunders says he believes Gen Y -- not to mention plan participants in other demographics -- will respond better to a status message that will simply inform them of their position and whether they need to adjust their investment.

Carol Klusek, head of retirement and financial benefits programs for Aetna, the insurance and financial benefits provider headquartered in Hartford, Conn., says she's not surprised by the findings of the Hewitt survey. Klusek develops and implements financial-education programs for the company's roughly 34,000 employees.

"One of the things I've noticed very clearly with the Gen Y [employee] is that they're very much in the here and now," she says. While Klusek says there's nothing unusual about a mid-20s employee who cares more about weekend plans than a retirement check 40 years away, she adds that the typical Gen Y employee also has burdens that previous generations may have escaped, such as credit-card debt.

"If they have credit-card debt, I think they'll tend to be focusing on [that]," she says. According to a 2008 study by college-lending firm Sallie Mae, college seniors with at least one credit card graduated with an average of $4,138 in credit-card debt -- up 44 percent from 2004.

Compounding the financial burden of credit debt, including student loans, Klusek says, is that the economic crisis has made the notion of contributing to or staying in a retirement plan a challenge.

To meet that challenge for Gen Y and other employees, Aetna has embraced electronic communications by featuring education tools on its corporate intranet. When employees log on to the system when they arrive in the morning, they can find financial education podcasts, Webcasts, newsletters and online calculators.

Klusek says it's important to keep financial education consistently visible to every employee. "It's a constant, trying to reach out to people," she says.

In addition, her office sends out e-mail postcards, called "e-cards," encouraging employees to attend a particular financial Webcast or other event. "We try to keep the e-cards short and visually appealing," she says. "It's effective for Gen Y, but also for many other people as well."

Klusek says that, although electronic communications are effective, she's a strong believer in the power of workshops as well.

Beginning in late 2007, she says, her office began a financial education campaign that paired the e-cards and online tools with group workshops and one-on-one counseling. Even considering the dreadful state of the economy, the campaign has been a success.

"We've seen our 401(k) participation rates go up," she says. "It's close to four percentage points [higher], and we think, in this economy, that's phenomenal."

She adds, however, that while her department has analyzed the data by salary, it hasn't studied the age demographic of the participants.

Another device that Klusek has begun to implement is designed to make enrolling in a 401(k) plan as easy as pushing a button.

"We just send them a link and said, 'If you click here, you'll get enrolled at 3 percent.' They don't have to fill out anything," she says. While the required legal and financial information was included in the e-mail, Klusek says the message is designed to make it simple.

"iTouch" Retirement

Aetna is hardly alone. At MassMutual Financial Group, based in Springfield, Mass., Jill O'Brien, the assistant vice president of retirement education specialists, says Gen Y employees are looking for the quickest and easiest way to enroll in a DC plan and that HR executives recognize the challenge.

To meet the challenge, MassMutual created an appealing and somewhat geeky tool called "e4," an iPod iTouch that's been modified to provide financial education, 401(k) information and a quick way to sign up via the device. The tool is handed out to potential participants when MassMutual representatives meet face-to-face with their clients' employees.

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The name "e4" stands for "Enhanced Electronic Education Experience," but that's almost beside the point, says O'Brien, when users get their hands on the gadgets.

"Ninety-five percent of the people in the room who are using the e4 device will enroll in the plan if they're not enrolled," she says.

Sadly, the device is not a door prize; the iPod's download capabilities have been disabled and users must return the device when the meetings are over.

Nevertheless, O'Brien says, the e4s are a hit, not only because of the tech-sexiness of the device, but also because they make enrollment easy. And easy is the name of the game. Kris Gates, MassMutual's assistant vice president of participant and interactive marketing, says employees who are under 30 represent a unique challenge to plan sponsors and HR executives responsible for providing financial education.

"They're just inundated with so much data," says Gates. Because they grew up in the age of the Internet, he says, "Gen Ys have always lived with the answers at their fingertips. So, what we're seeing with this group is that they just want somebody to tell them the answer."

Younger employees don't care to wade through a sea of gray print until they find the advice and they don't want to waste time listening to why a 401(k) plan is good for them, says Gates. With that in mind, he says, MassMutual is redesigning its print material, putting the actionable plan requirements such as signing up, in the front of their plan booklets and putting the more intricate details, such as the definition of asset-allocation strategies, in the back.

While Gates says the financial industry, in general, lags in technological development compared to other industries, the tech savviness of Gen Y participants is causing a greater push to develop new ways to communicate services. It's all about "edutainment," he says. "Really, this is for Gen Y. Most of them aren't going to sit through 20-minute online presentations. They want to be entertained, maybe through video games."

A Case of Cabin Fever

Annette Grabow, the manager of retirement benefits for Mortenson Construction, a Minneapolis-based firm with nearly 3,000 employees, is already clued into the edutainment concept.

Grabow says she began concentrating on financial education about seven years ago because she suspected that employees weren't making sound financial-planning choices.

"What I heard the most was, 'I can't afford to do this, because I need the money now,' " she says. "It just bugged the tar out of me."

Grabow says she concentrated on providing workshops that educated employees on the broad topic of personal finances.

"[We showed them], 'This is what enables you to save, this is what enables you to not tap into this money and these are the smart things to do,' " she says.

In addition to the workshops for current employees, though, Grabow says she wanted to catch the new hires as quickly as possible. Ironically, her competition for attention was human resources.

"The new-hire packet from HR is, like, an inch-and-a-half thick. It's totally overwhelming, and my little piece of 401(k) information in there was totally lost," she says.

So, about a year-and-a-half ago, Grabow teamed up with a software programmer to create an interactive financial-education game on a CD.

Called "Cabin Fever," the game is "something you cannot miss among all the boring stuff, and stands out like crazy," she says.

The object of the game is to build a comfortable and secure retirement cabin in an idyllic future. Make the right choices with your finances, and you're set. "If they don't make the right choices, they end up in a cardboard box," she says.

The game is intended to teach new hires about fundamental financial decision-making and shows players the effects of financial decisions they make today by projecting from 10 years to 40 years into the future.

The game has been a hit, not only among new hires at the company, but also among investment professionals. The trade journal Pension & Investments, a money-management journal catering to executives in the institutional-investment market, awarded "Cabin Fever" first place in March at its recent P&I Eddy Awards. The awards recognize plan sponsors that provide superior investment education to participants.

Grabow says she hasn't begun to use podcasts yet, but her HR colleagues have used them for other purposes, and she's evaluating whether they would benefit her financial-education program.

Grabow and others say that regardless of the medium -- e-mails, Webcasts, podcasts or other forms of communication -- employers must keep pushing financial education and the importance of participating in -- and keeping money in -- a defined-contribution plan.

"Don't give up," says Klusek. "You can't catch them with twice-a-year e-mail messages. It's a constant, trying to reach out to people.

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