With three generations active in the workforce and another group about to join, defined contribution pension plan sponsors must consider the unique needs and behaviours of the different demographics.
Compared to baby boomers and generation Xers, millennials exhibit greater risk aversion, said Katie Taylor, director of thought leadership at Fidelity Investments. “They don’t take risk with the money they earn, because they are saddled with student debt,” she said.
That’s not surprising, given what millennials have had to endure, said Pat Leo, director of institutional business development at Sun Life Global Investments Inc. “Arguably, they’ve experienced greater market volatility than previous generations,” he said. They’re also staying in school longer and face the prospect of lower-paying jobs in a sluggish employment market, he added.
By contrast, generation Xers and baby boomers came into the workforce at a time when jobs were abundant, the economy was growing steadily and markets were more bullish, said Leo.
Generation X, though, has its own challenges. “The issue we see in DC investing with gen-Xers is that they have the highest levels of borrowing against their DC plans,” said Taylor. “They’re saddled with many financial responsibilities, [including] paying for daycare or for college, [while] dealing with aging parents.”
Matthew Brancato, a department head with Vanguard’s institutional investor group, pointed to target-date funds as an investment solution for participants of all ages. Targetdate funds reflect “the principles of asset allocation, diversification, low cost, which work across generations,” he said.
While Taylor said target-date funds are great for younger workers, she suggested that once they’ve accumulated bigger savings, “they start to look at [other investment options, such as] the managed account in their plan lineup, and are willing to pay for it.”
Read more articles from the 2016 DC Investment Forum