A notable trend in the new American workforce is the rise of temporary employees, freelancers and independent contractors such as — if you're trying to hail a taxi
in New York or any other major U.S. city — the legions of drivers working for Uber, Lyft and other ride-sharing apps that are displacing yellow cabs and the traditional car-service industry.
The so-called “gig economy” is here to stay, and in a sign of the times,
Betterment, one of the first robo-advisers, last month announced a partnership with app-based behemoth Uber to offer drivers access to retirement savings services.
The strategic move was recognition of the fact that this new Sharing Economy 2.0 model will be characterized by a workforce reliant on “alternative work arrangements,” such as part-time or contract work; and also that millennial workers, those 18 to 35, are coming of age during a disruptive economic landscape and will find it increasingly challenging to save for retirement while also building for the future.
MILLENNIALS NEED ATTENTION
This is where advisers can play an important role. As reporter Liz Skinner outlines in her Aug. 26 report, advisers should pay particular attention to helping millenials understand the crucial need to save for retirement and avoid the hazards of raiding one's 401(k) savings too early — which should always be an option of last resort.
“There will always be another house, or deal, or opportunity,” said Joshua Goldsmith, a financial adviser with Scarborough Capital Management, which conducted a survey of adults who have 401(k) savings. “You only get one shot to save and build your retirement.”
EARLY WITHDRAWAL
It's sensible advice, of course, but the temptation to disregard sound counsel is evident in the early-withdrawal statistics. Financial advisers who focus on millennial clients should know that young adults are the most inclined to dip into their savings to invest in other priorities. About 12% of young adults withdrew from their 401(k)s to buy a first home, according to the
Scarborough Capital survey. Among those 35 to 44 years old, only 7.7% have done so, and the stats dip even further for older adults.
Advisers should be advocates for those most at risk of breaking into their savings. More and more, young people no longer work for one employer for long lengths of time. They are more mobile and prone to job-hopping, and as a result, 401(k) plans oftentimes get lost in the mix. But when balances get transferred or rolled over when a worker changes jobs, advisers should be there to hammer home the need to preserve those savings. Of course, this is smart advice for all clients, no matter what age, but as the Scarborough survey shows, millennial clients are the most vulnerable to falling down that slippery slope of cracking open the piggy bank.
“We always urge clients to do everything in their power to not disrupt the tax-deferred and compound interest of the 401(k),” said Brad Sherman, president of
Sherman Wealth Management.
The risk is that young Americans will spend countless future years trying to recoup those savings that may be lost, when greater financial discipline now is the better option. As Scarborough's Mr. Goldsmith noted, people are always inclined to focus on short-term wants over longer-term goals.
“People constantly think, 'I can make that back later.' But the likelihood of doing so may be slim,” he told InvestmentNews.
It's up to financial advisers to be the vanguard and first advocates for not tapping 401(k) plans — the bedrock for most Americans' retirements. If the next generation increasingly cashes out and borrows against their future, more and more will never reach the critical mass needed to build their nest eggs. It's up to financial advisers to make sure that doesn't happen.
