Gen Z and millennials take the lead when saving into their 401(k)s

A challenging economic environment hasn't stopped younger employees from prioritizing their 401(k) balances and committing to healthy savings habits early in their careers. 

Bank of America's quarterly participant pulse survey found that overall, 401(k) balances have increased $7,250 in 2023, up 9.6% from last year. Employees contributed at a rate of 6.5% from January to June of this year, with Gen Z and millennial employees the most likely demographic to increase their contribution rate. 

However, the report revealed that hardship withdrawals have crept up in 2023 — increasing 36% from the same period last year. These conflicting behaviors reveal that while younger employees are getting the message of starting early, keeping up those behaviors long-term is still a challenge, says Lisa Margeson, managing director of Bank of America's retirement research and insights group. 

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"We've seen more participants increase their savings to their retirement plan and it's really driven by some of the younger generations, which is nice to see as they're building for their futures," Margeson says. "Then there are those who are prioritizing their short-term needs over something that will come later in life. We continue to try and impress upon our participants and educate them on the importance and the power of starting early, and staying focused on your future self." 

While the BofA data does not specify why employees are taking hardship distributions, those choices come with a heavy financial penalty. According to the IRS, any withdrawal will be subject to income tax, in addition to a 10% tax if the money is taken out before the age of 59- and-a-half. While still a small percentage of participants (just 0.52%) took a withdrawal this year so far, this data is an important indicator that employees are still in need of serious financial assistance, Margeson says. 

"We focus on that because you really have to have a significant qualifying reason for a hardship, which is signaling that there are some fairly significant needs out there," she says. "With smart plan design and specific engagement and education techniques, we know we can try and curb that behavior to encourage smarter behavior, which is letting the money sit there and grow and not tapping it for short-term needs." 

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Encouraging employees to invest in HSAs is one way to protect from the financial impact of  healthcare costs, and something an increasing number of participants are engaging with, Margeson says. BofA's data found that HSA account balances increased from 2022, from $3,931 to $4,397. Thirty-seven percent of account holders contributed more money into their account than they withdrew to use on their healthcare expenses. 

Additionally, ensuring that employees are automatically enrolled in their 401(k) plans and then that those contributions are automatically increased is a critical tool to helping employees save, Margeson says. Employees can also funnel any raises into their 401(k) account as an investment into their future selves. 

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Beyond retirement, employers should be providing a modern financial wellness experience for their organizations — as younger employees prefer a digital-first approach, employers have an opportunity to "stay in front of" their financial needs, Margeson says. 

"Talk to your employees — ask them what they're looking for, what they value and what's important to them, and then just stay focused on their holistic financial wellness," she says. "A financial wellness program that includes support and education from a much broader perspective than just a 401(k) plan should cover education and engagement. We're already seeing the momentum of that."