401(k) Bonanza: Why More Americans Are Feeding Their Retirement Accounts

Participation in 401(k) plans continues to climb, and while Baby Boomers have the highest participation rate, Millennials and Gen-Xers have gained on the older.
By Chris Metinko ,

George Tan has only been out of college for little more than a year now, but that does not mean he does not think about retirement.

"Since our society walked away from the pension plans our parents and grandparents had, we have to look for alternatives for our retirement," said Tan, a 28-year-old electrical engineer living in Austin, Texas. "It's a no-brainer to invest in 401(k) when you have employer matching. Who wouldn't want to double their hard-earned money?"

Tan is not alone, as participation in 401(k) plans continues to climb. While Baby Boomers have the highest participation rate — at 65.9% — Millennials and Gen-Xers have gained on the older generation through the last five years as well, according to new numbers from Wells Fargo. Millennial participation has risen from 44.8% five years ago to 59.2%, while 63.5% of Gen X-ers now are contributing — up from 51.8%. Along the rise in 401(k) plan participation, diversification in plans also continues to climb — with Millennials leading the way.

"I'm not surprised to see that 401(k) participation rates are increasing," said Carolyn Kelly, a financial advisor at Hewins Financial Advisor in Redwood City, Calif. "There's now a lot more information immediately available to investors than there was in the past. When you couple this with increasing feelings of uncertainty around the longevity of Social Security, I think people are becoming more driven to save for their retirement."

Kelly said she also would expect to see these participation rates continue to climb higher due to recent improvements in retirement plan standards, and these investors should keep in mind a globally diverse portfolio is key.

"Everyone's heard the expression 'don't put all of your eggs in one basket,'" Kelly said. "Well, a diversified portfolio is structured with multiple 'baskets' that are designed to act differently in various economic conditions. The effect of a diversified portfolio is to help reduce the volatility which will always be important for any portfolio regardless if you are a Boomer, Gen-Xer or Millennial."

Howard Friedman, a financial advisor at 1st Mariner Bank in Baltimore, said the availability of automatic diversification investment choices, such as target date funds and risk managed asset pools, is lending to the climbing rate of diversification in plans. While participants used to have to choose their own funds from a provided list, he said now with target date funds and risk managed asset pools, risk is factored by retirement age and tolerance.

"Both the climbing participation rate in 401(k) plans and increase in diversification are good signs," Friedman said. "Saving is critical and one of the most important tasks in one's life. The increased rate shows people are taking responsibility for their own future and taking preparation for retirement seriously."

Friedman said when combined with rebalancing, diversification can better guarantee that one's money will grow at a competitive rate. He said the diversification goals he recommends for Baby Boomers is 40% stock and 60% bonds and fixed, while for Gen-Xers, it should flip to 60% stock and 40% bonds.

"At this age, you need to have a fair portion of stocks in your portfolio to prepare for around age 80, when you will be retired and completely dependent on this income," he said.

For Millennials, Friedman recommend a diversification goal of 70% stocks and 30% bonds and fixed.

Rebecca Pavese, a financial planner and portfolio manager with Palisades Hudson Financial Group in Atlanta, added Millennials should evaluate how much risk they are willing to take when constructing their investment portfolios — since as a group they tend to be risk averse. She said once they determine what asset allocation is appropriate for them, they should continue to diversify their equity portfolio so they have exposure to multiple funds.

"Diversification is the key element that will allow Millennials to invest appropriately while managing their inherent aversion to risk," Pavese said.

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