Younger baby boomers and Gen X are the first demographics that, broadly speaking, missed out on defined benefit pensions and thus had to rely on 401(k)s as the employer-sponsored retirement plans of choice. As a result, workers in those generations know a thing or two about 401(k) offerings.
Typically, the funds available to employees in 401(k) address just stocks, bonds and cash and they’re bland by design. Think broad market funds with hundreds or even thousands of components. In the past, if there was “glamour” to be found in 401(k)s, it was via smaller stocks or emerging markets funds or perhaps corporate bonds.
More recently, some 401(k) providers have expanded fund choices, bringing more adventurous, tactical, even aggressive fare. Not surprisingly, it’s younger investors, millennials and Gen Z, that are willing to embrace such concepts in their employer sponsored plans.
“From 2023 to 2024, the theme preferences for ETFs in 401(k) accounts shifted sharply among American generations. Younger cohorts, like Gen Z and Millennials, showed the most notable changes toward new and innovative sectors, while Boomers and Gen X kept steadier, more traditional preferences,” according to Investors Observer.
Why It Matters
Younger investors’ proclivity for risk in retirement plans is noteworthy for multiple reasons, including underscoring the need for these workers/investors to work with advisors and be up front about what they’re allocating to in retirement accounts.
Second, that relevance is enhanced by the fact that 401(k)s are likely to get “spicier” because the White House is allowing it. President Trump is mulling an executive order that could bring commodities, cryptocurrency and private equity to 401(k)s. If you’re in your 50s or 60s, you likely though a day would never come that such asset classes would be available in employer-sponsored retirement plans. Indeed, there are generational divides at play when it comes to 401(k) allocations.
(Chart Courtesy: Investors Observer)
As the chart above confirms, younger investors, when presented with the option, will embrace cryptocurrency in retirement plans, but some of their older counterparts are joining that party, too.
“Gen Z’s preference for crypto and digital asset ETFs more than doubled, jumping from 26% in 2023 to 59% in 2024,” adds Investors Observer. “Millennials also made a significant leap in crypto themes, rising from 30% to 57%. Even Gen X increased their interest, moving from 21% to 36%. ”
Love for Thematic ETFs Extends to 401(k)s
When available, thematic exchange traded funds are also popular retirement plan options with younger workers. That jibes with their willingness to take on risk and their enthusiasm for disruptive themes such as artificial intelligence (AI) and fintech, among others.
“AI/Robotics themes became much more favored, as Gen Z grew from 22% (based on combined AI and robotics in 2023) to 41%,” according to Investors Observer. “Millennials went from 20% to 45%, while Boomers showed an increase from 17% to 33%. These sectors represent quickly evolving innovation and are drawing the bulk of their popularity from younger age groups. ”
This could be a point of emphasis for advisors because thematic ETFs are tactical plays and may be best-suited for taxable accounts, not more conservative instruments like 401(k). Younger clients should know what they’re getting into with theme-driven concepts, cryptocurrency and other glitzy asset classes. They might just realize those are best left out of 401(k)s.
