Generation 401(k): Why Gen Z workers are saving more for retirement

Generation Z is saving for retirement at much higher rates than its predecessors. But it's not just the kids who are all right; it's also the settings of their 401(k)s.

Over the past two decades, Americans of all ages have increased their participation in workplace retirement plans, according to a new study by the investment firm Vanguard. But Gen Z in particular stood out: In 2021, 62% of America's youngest workers were actively saving in a 401(k) — more than twice the rate of the same age group in 2006, when only 30% participated. This was the highest increase of any generation.

"We're just delighted," said Dave Stinnett, head of strategic retirement consulting at Vanguard. "We were impressed to see improvements across all the generations, but the improvements are particularly significant for the youngest cohorts."

Vanguard defined Generation Z workers as those between 18 and 24 years old. The U.S. Census' definition skews a bit older, pegging the Zoomers as those born from 1997 onward, meaning the oldest are now 26.

Either way, this group is far outpacing the 20-somethings of two decades ago in terms of 401(k) activity. But this is not just because Gen Z'ers are better savers. More likely, Vanguard found, it's thanks to a new generation of 401(k) features — particularly automatic enrollment. 

"It really is attributed to the fact that they are being increasingly defaulted into participating in the plan," Stinnett said. "Their choice is not, 'Should I get informed on my 401(k) plan and decide when it's convenient to participate?' Their choice is really … whether they want to opt out or not, and the data is showing that very few are opting out."

The 401(k) is by far America's most common workplace retirement plan. In 2020, about 60 million U.S. workers were saving in one of these plans, according to the Investment Company Institute. But not everyone who's eligible participates. In 2021, only 75% of private industry workers with access to an employee-provided plan actually enrolled in it, according to the U.S. Bureau of Labor Statistics. 

Auto-enrollment offers a possible solution. This practice, which defaults workers into enrolling in their retirement plans and then gives them the option to un-enroll, has been found to dramatically increase participation. According to one previous Vanguard study, this default more than tripled the number of new hires who signed up for their plans — from 28% to 91%.

That appears to have greatly benefited Generation Z, which came of age just as auto-enrollment was growing more common. In 2006, Congress passed the Pension Protection Act, which gave employers the authority to default workers into their retirement plans. At that time, only 11% of 401(k)s featured auto-enrollment, according to Vanguard. By the end of 2021, 50% did.

This has had an enormous impact on younger Americans' saving habits. In 2021, Generation Z's plan participation rate was 62% overall, but for voluntarily enrolled savers it was only 27%. For those who had been auto-enrolled, by comparison, it was 88%.

But it wasn't just Gen Z who did better. Across all age groups, 401(k) participation rates increased — only 62% of Americans contributed to their plans in 2006, but 82% did in 2021. Among those who were auto-enrolled, the rate was even higher: 94%.

Some financial advisors have witnessed this effect of this default on investors. Andre Jean-Pierre, the founder of Aces Advisors in New York City, has between 80 and 90 Gen Z clients. For them, he said, auto-enrollment has been a "game changer."

"Left to make the decision, most people will just do the default," Jean-Pierre said. "So when they made the default decision to actually save, I believe they changed a lot of lives with that."

In addition to auto-enrollment, Vanguard also found that two other defaults helped Americans save: automatic contribution increases and the use of target date funds in 401(k)s. Both of these, the study said, helped increase U.S. deferral rates from 7.2% in 2006 to 7.7% in 2021. For Generation Z, the increase was slightly larger, from 4.8% to 5.4%.

Nicole Cope is the senior director of wealth advisors at Ally, an investment bank based in Detroit, and an expert on behavioral finance, which is the study of how psychology affects investing decisions. She explained the impact of these defaults as a matter of "status quo bias."

"If you're in a situation, the likelihood of you changing the environment around you in that situation is low," Cope said. "So we're capitalizing upon the fact that if we get an investor into the platform, the likelihood they're going to stay there is high."

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Put another way, all these default settings have something else in common: They make investing easier.

"A lot of people sometimes have difficulty with complex decision making," Stinnett said. "So if you can structure things in such a way as to make it as easy as possible, you often will get better results."

These results, Stinnett said, will have the biggest impact on workers of America's youngest generation — who have the longest time to save.

"Retirement savings is very much a long game," he said. "And so if you get people in earlier and earlier, retirement outcomes will get better, and retirement goals get easier to achieve."