401(k) contributions lagging, especially among millennials: BofA survey

Most American workers are indeed thinking about saving for retirement. They just aren’t putting their money where their minds are.

While the majority of eligible employees participate in 401(k) plans (58%, in line with 2020 and 2019), there's still room for improvement as 61% of participating employees contributed less than $5,000 in 2021, according to Bank of America’s 2022 Financial Life Benefits Impact Report.

Furthermore, the report showed fewer than 1 in 10 workers contributed as much as the IRS allows. Internal Revenue Code Section 402(g) limits the amount of retirement plan elective deferrals that may be excluded from taxable income in a taxable year; the limit for 2022 is $20,500.

“While it’s encouraging to see strong, stable participation rates over the last few years, more can be done to drive increased utilization and education of this benefit. To take full advantage of a 401(k), employees should aim to invest at least enough to capitalize on their employer match and do all they can to maximize contributions over time," said Kevin Crain, head of retirement research and insights at Bank of America.

"On the other side of the coin, employers can adopt auto-enroll and auto-increase features to ensure their employees are capitalizing on their 401k plans. These tools are powerful in driving both employee engagement and increased contribution amounts," Crain said.

“I am not surprised so many people miss out on contributing more to their retirement, especially those navigating finances on their own. As investors, we are inundated with financial suggestions, and it can be hard to pinpoint the best ones," said Melanie Jones, senior vice president at Evoke Advisors. "It can be especially difficult to zoom out and understand the long-term benefits without getting overwhelmed. The pandemic hasn't helped either as restrictions lifted, many people spent more on travel, concerts and more, and those have gotten more expensive which leaves less room for saving.”

The study found that Gen Z women are closing gender gaps in 401(k) balances. Only 55% of women participate in 401(k)s (vs. 62% of men), and men have 55% more in 401(k) balances ($108,000 vs. $70,000), according to the report. However, Gen Z women have overtaken Gen Z men in total retirement savings, with 3% higher account balances on average.

Millennials aren't leveraging the full potential of 401(k) benefits. The Bank of America study showed millennials are the least likely to participate in a 401(k) plan (54% vs. 65% of Gen X and 59% of baby boomers), and 70% contribute less than $5,000 annually, which is significantly higher than Gen X (54%) and baby boomers (51%). Moreover, only 4% are contributing at the allowable IRS limit (vs. 12% of Gen X and 14% of baby boomers). 

It turns out that millennials are also big fans of target-date funds, investing almost two times as much money in TDFs as baby boomers, according to the report.

“Millennials have faced many headwinds. Between inflation, high costs of home ownership and student debt, these factors may be playing a role in preventing millennials from properly preparing for their future," said Bank of America's Crain. "This underscores the importance of employers providing holistic, personalized advice to help address employees’ unique and broad financial needs.”

“Many of my millennial counterparts find investing and saving overwhelming," Evoke's Jones said. "There is also an incredible amount of misinformation on social media about how to make prudent decisions. Sometimes, the simplest investment choices, like contributing to a 401(k), are overlooked by novice employees because their friends are talking about crypto and Roth conversions.”

Finally, younger workers are leading the way when it comes to making an environmental or social impact with their investments. The study showed 15% of employees invested in ESG funds, a 50% increase over last year.

Nevertheless, only 11% of 401(k) plans offer ESG-focused funds in their investment lineup. When such funds are offered, though, 52% of millennials invest in ESG funds, compared to 32% for Gen X and 14% for baby boomers.

“I am asked more and more by younger clients on how to make their money align with their social and environmental viewpoints. It goes beyond making one-off donations. Younger clients tend to want their adviser and investments to be a statement about their personal points of view,” Jones said.

The survey reflects proprietary data on 3.1 million participants in Bank of America’s employee benefits programs.