Olympic levels of eye-rolling have been set in motion by the recent adventures of young adult investors.
The investing establishment thinks very little of what Gen Z and millennial investors are doing with their commission-free stock trading apps and their willingness to buy out-of-favour stocks like GameStop Corp. GME-N +8.90% increase to make a point.
Every generation of investor has a rough initiation to investing – boomers and some Gen Xers certainly had theirs during the tech bubble of the late 1990s. And, anyway, there’s a bigger concern in the way young people are investing. Too often, they’re turning down free money from their employers by not participating in workplace retirement savings plans.
Defined benefit pensions, the money-for-life gold standard in company retirement programs, are a rarity when you’re starting a career. But many companies offer defined contribution pensions or group registered retirement savings plans, which share one key attribute of the DB pension. When the employee invests money in the plan, the employer makes a matching contribution.
At Kuntz Electroplating Inc. in Kitchener, Ont., employees can put between 2 and 6 per cent of their gross salary in a voluntary group RRSP and it’s matched by the company with contributions of 1 to 3 per cent. In other words, 50 cents on the dollar.
Kuntz is in the business of painting and chrome-plating parts that go into Harley-Davidson motorcycles, among other things. After a year at the company, employees attend an orientation session about the group RRSP program. How many young employees go for it? “One or two, and you might have a dozen people in the room,” said Donna Diebel, manager of human resources and public relations.
Some employees do decide later on to participate in the group RRSP – 41 of 88 Gen Z or millennial workers are members. But Ms. Diebel still marvels at how many stay away. “We tell them right from Day One that this is one of the benefits [of working at the company],” she said. “But you can’t win people over with that 50 cents on the dollar, sadly.”
The importance of young people grabbing onto matching retirement contributions from their employer, whether through group RRSPs or pensions, cannot be overstated. Overall pension coverage in the work force has declined in the past few decades, and young adults are particularly disadvantaged because many work in the gig economy of temporary jobs without benefits. Anyone with a pension today has a premium workplace perk.
And yet, it’s common for young adults to not participate in voluntary retirement savings programs at work.
“Young people have so many demands on their money right now,” said Janice Holman, head of the DC pension practice at the actuarial consulting firm Eckler Ltd. “People are graduating with higher student debt, and it’s expensive to live in cities like Toronto. There’s also this consumer mindset, where people value what they can get today and they don’t think about the future as much.”
Ms. Holman said some companies are making their retirement plans mandatory to improve participation levels, while others auto-enroll new employees and allow them to opt out if they decline to participate. Still others allow new employees to immediately start in the company retirement program (there’s sometimes a delay, as at Kuntz), which means they never get used to a paycheque without the required deductions.
“Where plans are voluntary, it’s very difficult to get young people to participate,” Ms. Holman said. “If it’s just something that’s in their benefits package along with 50 other papers they get when they onboard at a company, participation is not going to be good.”
Ms. Holman said one additional step employers are taking is introducing group tax-free savings plans, which offer more flexibility than RRSPs and can be a good fit for younger workers (employers may or may not make matching contributions to group TFSAs).
Ms. Diebel said Kuntz Electroplating has had its group RRSP since 1989 and getting young workers to buy in has always been a struggle. She’s heard from young workers that they’re too young to think about retirement and that they can’t spare the money. “My favourite reason: ‘My grandmother told me it was a bad investment.’”
Ms. Holman said group RRSP and DC pensions are typically based on a type of low-cost mutual fund offered through insurance companies. You can find sexier investing options are out there, but one key detail will be missing. They don’t add 50 cents or more to your account every time you contribute $1.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, February 4, 2021