Why are millennials snubbing defined contribution retirement plans and stashing their money into taxable brokerage accounts instead?
The retirement plan industry is overly focused on a goalnamely saving for retirementthat doesnt resonate with young investors, says Chris Brown, a principal of Hearts & Wallets, a research firm based in Hingham, Mass.
Millennials, or Generation Y as the youngest generation of investors is also known, arent thinking about or even looking to retire, says Brown. Theyre looking for financial freedom and greater control of their work-life balance. Almost two in five (38%) are focused on saving to have enough money to be able to work less, according to a new Hearts & Wallets report.
Theres a disconnect between what industry is telling them they should be saving for and what they really want to do, says Brown.
In the report, Hearts & Wallets found that 74% of affluent millennialsthose with more than $100,000 in investable assetshave assets in online brokerage accounts, while only 67% have assets in a defined contribution plan. This cohort is alone among working age segments to be more likely to invest assets in online brokerage accounts than retirement plans, according to the research. For example, only 30% of millennial investor assets are allocated to employer-sponsored retirement plans, in contrast to Generation X, the next age cohort, which has allocated 48% of their assets to such plans.
Millennials hesitate to invest too much money in retirement plans because they dont have access to the money without paying a penalty. The penalty-free access to capital and greater investment choices of online brokerage accounts make them a far more attractive choice for younger investors generally focused on short-term goals, such as saving for vacation or an emergency fund.
Rather than focus on retirement savings, the retirement plan industry should stress benefits that appeal to millennials, such as tax deferral and employee matches, the research firm urges.
Since many Gen Yers dont yet own homes and thus dont qualify for the mortgage interest deduction, perks like tax deferral or applicable free money from an employer match can be very appealing, says Brown. Those are big benefits that we think are undersold a bit by the 401(k) industry.
The preference for online brokerage accounts squares with a recent J.D. Power investor satisfaction study that found that younger investors are far less satisfied with their investment firms than older investors are. For example, 39% of investors under the age of 35 said that their advisor had a good understanding of their investment goals. Among investors in retirement, 66% said the same.
The Hearts & Wallets study is based on a survey of 4,971 U.S. households conducted in June of 2013.
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