Coming of age

"Hook up with your 401(k) plan," reads the headline of a poster in the marketing department of a mutual fund organization. The sexual innuendo is far from subtle, and so far the poster has not been shown beyond the department's walls, but the fund's marketer thinks the vernacular of the message will get through. "We're trying to connect with younger employees," he says. "And in market tests 30-year-old employees tell us that they get what we're saying."

Reaching this younger generation is critical for the retirement planning industry. As the baby boomers, the 80 million Americans born between 1946 and 1964, begin to retire and close down their 401(k)s, the industry must find new customers -- and vital sources of revenue -- in the younger generations. Plan providers and sponsors are thus focusing their energies and attention on marketing to Generation X, generally defined as the 61 million Americans born between 1965 and 1979, and the Millennials, the 82 million born between 1980 and 1999. Their success will help determine if the 401(k) industry can strengthen its anemic profit margins -- down from 10 percent in 1999 to an estimated 5 percent in 2004, according to consulting firm Sterling Resources -- and grow assets through the coming decades.

No one precisely tracks net fund flows, but Sylvester Schieber, director of research for consulting firm Watson Wyatt Worldwide, estimates that withdrawals from company defined contribution plans have already begun to outpace contributions.

"Fifty-seven percent of our defined contribution assets are in accounts of people age 50 and over," reports Diane Talbot, director of defined contribution product development for Merrill Lynch & Co., which administers $70 billion in defined contribution assets. "As baby boomers' assets are depleted, it becomes critically important to the industry to increase the savings of the younger generations."

Providers need not reinvent the wheel in marketing to Gen X and the Millennials, also known as Generation Y -- the benefits of disciplined saving pertain at any age, after all -- but money managers and employers are convinced that they must adapt their approach to the sensibilities and style of younger workers.

How to do that? The retirement industry is just beginning to grapple with the question, but already plan sponsors and providers have revised a raft of business plans and launched several new marketing initiatives. They're conducting more-exhaustive surveys of their participants to better identify the needs and concerns of younger workers. They're boosting online communication and overhauling marketing brochures. And recognizing that they need more effective in-house advocates to persuade younger employees to save for retirement, 401(k) providers are enlisting older employees to lead the effort.

"Service offerings and communications are not optimized for the different attitudes of Generations X and Y," says Walker Smith, president of Yankelovich Partners, a Chapel Hill, North Carolina­based market research firm. In addition, Smith says, "younger workers' incomes don't buy as much as baby boomers' incomes did, and these workers are more family- and kid-oriented than boomers were. They have not yet come to the conclusion that 401(k)s are for them." The $2.4 trillion 401(k) industry must persuade younger workers to come to a different -- and for the industry, more profitable -- conclusion.

Not surprisingly, participation rates and contribution levels typically increase with employees' age and income levels, so as Gen X-ers and Millennials get older and make more money, their 401(k) account balances will grow. According to surveys by Fidelity Investments and consulting firm Hewitt Associates, between 60 and 66 percent of eligible Gen X employees and 38 and 45 percent of Millennials participate in defined contribution plans. The comparable rate for baby boomers: between 68 and 72 percent.

Were baby boomers also so reluctant to embrace 401(k)s in their own salad days? No one can say for sure, since there is no data on the saving patterns of baby boomers, say, 15 years ago, when they were the same age Gen X-ers are today. Still, there is a general sense among plan providers and plan sponsors that Gen X and the Millennials are less inclined to save than the boomers were.

Certainly, Millennials were particularly stung by the 2000 market crash. Boomers and Gen X-ers had by then experienced several market cycles, but Millennials had no frame of reference when the Nasdaq cracked and the three-year bear market set in. "It has become a challenging period to initiate young people into the system," observes David Wray, president of the Profit Sharing/401(k) Council of America. "The volatility of the stock market in 2000 and 2001, plus terrorism and the financial scandals -- all this changes feelings about whether it is worthwhile to invest for 40 years from now."

In addition, younger workers are far more likely to cash out their 401(k)s when they change jobs. "I looked at the instances of cash versus rollover distributions," says Merrill's Talbot, "and found a disturbing story. [For employees ] under age 25, 83 percent of the assets were cashed out; for those over 25, it was 49 percent."

"These cash-out rates are a public tragedy," says economist and demographer Neil Howe, the co-author, with William Strauss, of Millennials Rising: The Next Great Generation.

Plan providers and employers are enlisting the services of demographers and generational scholars such as Howe to better understand the particular profiles of Generation X and the Millennials. "We have a whole department that works with [marketing consulting firm] Yankelovich," notes William Shaw, director of marketing and participant education with MFS Retirement Services. "They help us profile the attitudes of different generations and demographics."

Generation X-ers entered their 20s just as the early-1990s recession was getting under way. Many had grown up as the children of divorced parents. No wonder, sociologists and demographers say, that the generation is cautious. "They grew up without a stable family life, and they had trouble finding their first jobs," says Ann Fishman, president of the New

Orleans­based consulting firm Generation-Targeted Marketing Corp. and a consultant to the Department of Labor. "As a result, they're hardy and practical." Demographer Howe has a similar take. "They're collectively quite pessimistic about their economic future," he says.

Millennials, on the other hand, "all think they're going somewhere -- and somewhere good," notes Howe. They came of age in the midst of a strong economy and the greatest bull market in U.S. history. Why shouldn't they be optimistic? "Millennials tend not to be cynical, as many Gen X-ers are," says Deanna Miller, vice president of strategy and planning at Prudential Retirement Services. "Some of that is because of their age, but it also reflects their worldview and their feeling that when people work together they can have a real impact."

Both Gen X and the Millennials face greater financial obligations than baby boomers did as young adults. Largely because of their home mortgages, today's 25- to 34-year-olds carry a debt load, in constant dollars, that's about 80 percent greater than baby boomers did in 1983, according to an April 2003 study by the Government Accounting Office. Often college loans are a significant part of that debt burden. The American Council on Education, a think tank for 1,800 colleges and universities, reports that in 1992 graduates of public universities emerged with median loans of $6,400; for the class of 2000, the comparable figure was $15,400.

Already these generational perspectives have begun to change the marketing and management of 401(k)s, as the retirement industry addresses the particular demands and concerns of younger workers.

Boosting online communication is a common ploy for reeling in the under-40 crowd, and it often works. For example, Merrill Lynch, acting as the provider for an unnamed accounting firm's $1.2 billion 401(k) plan, dramatically boosted the participation rate for the plan's 19,000 employees, most of them under 30 and all of them out of the office for most of the week. After Merrill implemented an online enrollment system -- it contacted workers through personalized e-mails linked to the Merrill Lynch Web site and followed up with persistent reminders -- newly eligible employees enrolled at a rate of 92 percent, versus a 60 percent rate before the program was in place.

"We make e-mail a part of the campaign wherever possible," observes Lisa Margeson, senior vice president of communications at CitiStreet, a joint 401(k) venture of State Street Corp. and Citigroup. "Generation X-ers want to know the facts and don't want a lot of gloss and glitz, and e-mail is perfect for that."

In October 2003, Prudential, looking to define the factors that shape financial attitudes, hired KRC Research to present a 41-question survey to 500 Millennials and 500 boomers. As Prudential's Miller explains, "The attitudes we uncovered indicate that more Millennials would save if they understood the value to them and to society of participating." With boomers, she says, "it's sufficient to appeal to creating wealth, but Millennials don't have a perspective on what that word might mean for them in their future." Prudential concluded that for younger workers the self-interest argument -- save now or risk an unhappy retirement -- is most effective when coupled with an argument based on public-spiritedness: Help secure your generation's retirement and strengthen the whole U.S. economy by saving now.

Increasingly, plan providers are recruiting in-house advocates, employees who are influential with their peers and can make a strong case for joining the company's retirement plan. Prudential has recently done so to good effect, Miller says. "When we use advocates, prospective participants feel like they are joining a team rather than just saving money for themselves." Among employers who have used the system, participation rates increased about 5 percentage points, moving from the high 60 percent range to the low 70s in just six months.

To determine what might encourage younger workers to save, Merrill Lynch is taking a direct approach by surveying all employees under 30 at all their 401(k) clients. Says Merrill's Talbot: "Are they saving somewhere else? And if so, why? And if they're not saving in a 401(k) plan, why not?"

At Las Vegas­based hotel and casino operator MGM Mirage, whose workforce numbers 40,000, a direct-mail program not aimed at younger workers resonated with them nonetheless. "There were about 5,000 people with salaries between $20,000 and $70,000 who were not participating in our 401(k). The majority of these staffers were younger employees. We did a 'drip' campaign," where cards keep coming until the employee responds, notes Cindy Moehring, director of the company's retirement plan. "The campaign increased participation 8.7 percentage points overall, and within the 30-to-40 age group the increase was 11.2 percentage points."

Other providers are trying to appeal to younger workers' attitudes toward freedom and choice. "The boomer generation looks at a 401(k) as an extension of their employment with a company," observes Mike Avis, director of participant communication for J.P. Morgan Retirement Plan Services. In other words, many feel that enrolling in a plan is part of their job. But for Generation X and the Millennials, Avis says, joining a 401(k) "has to be perceived as an initiative they are undertaking themselves."

MGM Mirage, whose 401(k) assets total $427 million, makes age-based appeals in three brochures on asset allocation through lifestyle funds. The brochures are differentiated by photos of younger, middle-aged or older workers, each in age-appropriate leisure settings. "It's a new campaign, so we don't have any results yet," says plan director Moehring. "But we hope younger workers will better relate to the images and take a closer look."

Above all, executives say, avoid the word "retirement" in marketing to younger workers. "We do a lot of communications that don't use the word 'retirement,'" says Moehring. "We find that if we talk instead about 'savings,' we have a better chance of getting younger workers into our 401(k)."

Of course, in the city that embodies instant gratification, any attempt to persuade someone -- young or old -- to save is bound to face long odds.