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A New Generation of 401(k) Savers Looks to Be Better ‘Behaved’

Practice Management

According to a new report, the youngest workforce generation — Gen Z — is off to a great start.

The report — Generational changes in 401(k) behaviors[1] — finds that while all generations saw rising participation rates, because young participants typically have the lowest participation rates, Generation Z saw the largest increase.

In 2006, (just) 30% of employees ages 18 to 24 participated in their plan, but by 2021 that had risen to 62%, according to Vanguard.[2] And yes, automatic enrollment made a difference. In plans with voluntary enrollment designs in 2021, only about 1 in 4 employees participated, compared with nearly 9 in 10 among employees in plans with automatic enrollment designs. In fact, the report notes that only about 10% of contributing participants belonged to plans with an automatic enrollment plan design in 2006 — but by year-end 2021, more than 70% of all contributing participants, including about three-quarters of Generation Z and millennials, were in plans with automatic enrollment.

Asset Allocation

The Vanguard research also found — not surprisingly — that the use of target-date funds (TDFs), especially when chosen as an automatic enrollment default, has changed the composition of retirement assets. While in 2006, only 8% of all age cohorts were invested in a professionally managed allocation, by 2021 they were about six to seven times more likely to have adopted professionally managed allocations; 56% of millennial participants in voluntary enrollment plans and 68% in automatic enrollment plans were invested in a professionally managed allocation. “In other words,” the report notes, “about 6 in 10 millennial participants have turned portfolio construction over to an investment professional vetted by the plan sponsor fiduciary.”

All in all, the Vanguard data points to significant, positive impacts from the combination of automatic solutions and the rise of TDFs. The report concludes that while the 2008 global financial crisis has shaped millennials’ income and job prospects, those who are working are, on the aggregate, saving more because of automatic enrollment. Moreover — and various consumer attitudinal surveys notwithstanding — the report notes that although millennials have lived through two significant equity bear markets, their allocation to equities was higher in 2021 than in 2006 because they use TDFs.


[1] The report was based on a comparison of cohorts based on their ages in 2006 and 2021. Millennials were 25 to 40 years old in 2021, so the researchers compared 2021 millennials with workers ages 25 to 40 in 2006, and then made similar comparisons for Generation Z (ages 18 to 24 in 2021), Generation X (ages 41 to 56 in 2021), and baby boomers (ages 57 and older in 2021). 

[2] Data is drawn from a subset of Vanguard recordkeeping clients for whom they perform nondiscrimination testing. Those clients include 219 DC plans offered by the same set of companies in both 2006 and 2021, encompassing about 250,000 eligible employees in each year (Figure 1). Over this period, the demographic characteristics of the population shifted modestly.