Pitching 401(k)s to Generation Y is a Tough Sell

Financial firms are struggling to make a tough sell: Convincing 20-somethings who have barely flown the coop that it's time to put aside cash for a nest egg.

Until recently, mutual-fund companies and brokerage houses have spent far more time courting blue-blooded heirs, thrifty millionaires from the World War II generation -- and, of course, affluent baby boomers. Now, titans including mutual-fund companies FMR Corp.'s Fidelity Investments and Vanguard Group Inc. and banker Wachovia Corp. are wooing the boomers' babies, too. Their targets are the so-called echo boomers, or Generation Y, loosely defined as those 18 to 27 years old.

It's no small feat getting young people -- worried more about student loans, credit-card debt and Saturday night -- to save for retirement. Only about a third of those in the 21-to-30-year-old group contribute to their 401(k) plans, according to the Employee Benefits Research Institute, a Washington, D.C., think tank. Now, through quirky marketing campaigns featuring pizza parties, iPod promotions and even fake letters from parents, the industry is trying to get Generation Y to think about tomorrow.

"All these companies are spending seven figures" to find ways to exploit this "generational shift," says James Chung, president of Reach Advisors, a Boston-based research firm. The ones that figure it out, he says, "will clean up."

In 2005, financial firms shelled out $200 million to hawk their retirement plans, four times the amount only four years ago, says Peter Demmer, chief executive of Sterling Resources Inc., a financial-services consultant based in Paramus, N.J. Mr. Demmer says the money is aimed primarily at the young to replace the drain from aging boomers.

Baby boomers still remain the most lucrative target for many businesses. But money managers can't stop thinking about an inevitable and frightening fact: Baby boomers are starting to retire and will begin to take their vast wealth out of 401(k) plans.

Investors are now taking more money out of retirement plans than they are putting in, according to Cerulli Associates, a Boston-based financial research and advisory firm. Using its own analysis and trends identified by the Department of Labor, Cerulli estimates that in 2005, investors made $5 billion in net withdrawals from these plans and the outflow will increase to $39 billion in 2010.

Generation Y can't pick up all the slack. Though definitions vary, some estimates put Gen Y at roughly 45 million members, compared with more than 76 million boomers. But Gen Y is "widely considered to be the most significant age cohort since the baby boomers" for financial companies, says a study by Celent LLC, the Boston-based research firm.

To drum up enthusiasm with the postcollege crowd, Principal Financial Group Inc., a Des Moines, Iowa, provider of 401(k) plans, staged a 50-city carnival tour with "bungee runs," an "inflatable movie screen" and a "401-K Challenge" celebration.

Nearly half the participants in Principal's 401(k) plans are boomers, who are starting to retire. Principal has launched a national 401(k) promotion, holding pizza parties at companies and hiring dozens of young workers to pitch its 401(k) plan to Generation Y, including going to employees' homes at night.

At H.L. Wiker Inc., a Lancaster, Pa., construction company and Principal client, most employees are under 30. Participation in 401(k)s jumped to 90% of employees from 50% two years ago. Part of the reason: scare tactics. Mike Taterson, a 30-year-old tractor driver, says Principal painted a grim picture of Social Security. "One thing they told us -- don't count on that at all," says Mr. Taterson, who adds that nonetheless, he was glad to receive the guidance.

But many others don't heed the warning. Jennifer Brooks, 25, an office manager at the St. Louis office of NES Rentals Holdings Inc., another Principal client, knows she should be saving. In March, Chicago-based NES tried to entice her and other young employees to invest. Anyone who signed up for the first time or increased the amount they socked away would get a gift card to download up to eight songs from the Web. Employees also got emails telling them to "stretch" to reach their goals, Ms. Brooks says. "It didn't work on me," she says, ticking off her higher-priority financial obligations, including a student loan, car payment, and "clothes and shoes."

The NES pitch appealed to some young workers, though. Jay Laing, a 26-year-old rental coordinator at NES, says, "I was anxious to enroll when I began my career here."

At a recent Greater Boston Chamber of Commerce women's networking breakfast, Ellyn McColgan, president of Fidelity Investments' brokerage arm, suggested the attendees consider putting bonus checks into retirement accounts. Afterward, Katie Kush, 26, one of the audience members, rushed to her job at a Boston staffing agency. "My boyfriend's bonus went into our wedding fund," she says. That's a "little more top of mind" than retirement, she notes, adding that she needs to pay off her graduate-student loans.

To overcome such resistance, Fidelity, the nation's largest 401(k) administrator, recently began inviting dozens of young workers to its downtown Boston research lab, where the company is developing new products for Generation Y.

Fidelity's strategy: Grab them early with financial offerings, such as checking accounts tied to money-market funds, which are geared toward managing "short-term" finances. On a recent morning, through one-way glass, two Fidelity technology specialists watched a Gen Y prospect's reaction to a new money-market account. Though he seemed intrigued, his reaction also suggested the hard work ahead. "What is a money market?" asked the 26-year-old man, dressed in a T-shirt, khakis and sneakers, accessorized by a bracelet.

The subject, who received a stipend that Fidelity declined to disclose, provided other insights. Like many Web users, he expects instant access to impartial customer feedback, on the model of book reviews on Amazon.com. To satisfy him, Fidelity researchers discussed posting a spreadsheet comparing Fidelity's investment performance with that of its rivals.

Fidelity is trying hard to keep pace technologically. "Web and email are old-fashioned to them -- what mom and dad use," says Charles Brenner, senior vice president at Fidelity's Center for Applied Technology.

So the company is developing personalized radio programs for Fidelity customers. The technology would examine each customer's account and create a composite of audio news clips to be downloaded onto iPods and other MP3 music players. If a customer bought shares of Web-search firm Google Inc., for example, Fidelity could deliver news about the company. Fidelity is also offering podcasting, letting users download investing advice to portable MP3 players, as is its mutual-fund rival Vanguard, which recently launched an "Investing 101" podcast. In April, E*Trade Financial Corp., New York, held a "Webinar" -- a seminar on the Web -- called "Investing and Trading for Generation Y." About 150 young investors participated in an online chat.

Generation Y has often been accused of being coddled by their parents through college and beyond. Taking advantage of that trend, Wachovia has tried to stand in for mom and dad. In April, the banking company, based in Charlotte, N.C., sent out almost 50,000 individual retirement account pitches disguised as a "letter from your parents." But the company apparently struggled with just how edgy to be. A draft of the missive pleaded with "our dear child" to put money into an IRA while paying rent, buying DVDs and going to those rock concerts that "sound like a pig being strangled." In the letter actually sent out to customers, the squealing-pig imagery was toned down to a reference to screeching violins from a fourth-grade concert.

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