Workplace retirement savings vehicles, such as defined contribution (DC) plans, are one of the most common ways that American workers save for retirement. DC plan programs in the United States totaled $8.9 trillion in assets as of Q3 2022,[1] representing 22% of total retirement assets in the country. This creates tremendous responsibility for plan sponsors in providing and managing retirement benefits on behalf of their employees. To help plan sponsors, we curated seven topics that we believe are top priorities for retirement programs in 2023.
1. Saving for Retirement: Expectations of Lower for Longer Investment Performance
Setting aside 2022’s bear market for equities and most fixed income types, it is important to acknowledge that capital market assumptions, which predict investment performance over 10-year and 30-year horizons, are lower than historical long-term investment performance. All else equal, it implies that retirement savers need to save more to achieve their desired retirement nest egg. This is especially concerning for retirement savers who are not aware of this change and do not understand the resulting need to increase their savings rates.
Because retirement savers are not always aware of the dichotomy between past and expected future investment performance, it is important for plan sponsors to maximize communication and education methods that encourage increased savings rates. Two specific methods we find successful with our clients include providing high-quality one-on-one or group financial education and assessing whether a plan’s deferral percentages for automatic enrollment and automatic increase are set at appropriate levels relative to expectations for lower future investment performance. It may also be necessary to review tools such as retirement calculators to ensure they are adjusted to reflect lower expected returns.
2. Examining the Investment Menu Review Process
One of the greatest responsibilities of defined contribution plan sponsors is to create and maintain an investment menu that allows participants to select a diversified portfolio in which to invest. The ongoing process of reviewing the menu should be regular and well-documented – and not just during or following challenging years for investment performance like 2022.
In particular, we see an uptick in plan sponsors looking to re-affirm their target date fund (TDF) suite selection or consider a change. As participant demographics change over time, it is important to evaluate whether the current TDF remains appropriate. We encourage plan sponsors to include in the review guidance from the Department of Labor’s “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries” and document the process and outcome. We recommend a review on a regular basis (typically at least every 3-5 years) and/or more frequently if there are material changes to the composition or characteristics of the participant group or material changes to the glide path or composition of the TDF.
3. Driving Employee Engagement through Plan Advocates/Plan Champions
Labor trends and the war for talent is forcing employers to shine a light on the value and quality of their retirement benefits to be competitive in attracting and retaining talent. We work with clients to help analyze the competitiveness of their plan’s key features within their industry. With that in mind, even the most competitive defined contribution plan is only as effective as the degree to which employees engage with it.
We would suggest two ways to improve employee engagement. The first is to customize messaging/communications specific to participants at different knowledge levels and from different backgrounds. As the Baby Boomer generation nears retirement and Gen Z enters the workforce, workforce demographics are changing – and communication strategies need to adapt to stay relevant.
The second way we would suggest is the creation of “plan advocates,” outside of the HR team, who can help to champion the plan to other employees. This is especially productive when these plan advocates include hiring managers who can leverage this knowledge with both recruiting efforts and in retaining the teams that they manage.
As a final note, statistics show that DC plans are not benefitting all demographic groups equally. One way these methods can be particularly effective in improving equitable outcomes across the workforce is to recruit advocates from a variety of backgrounds and experience/career levels. Human beings (plan advocates) can often help customize messaging in a way that improves impact relative to generic messages sent to all participants.
4. Delayed Retirements due to 2022 Market Downturn
The 2022 market downturn caused some individuals to delay or consider delaying retirement. For participants who chose to delay retirement, it is important that they re-examine and re-affirm their asset allocation or target date fund vintage. Various industry surveys have shown a general misunderstanding of target date funds by participants, particularly around equity risk at retirement age and protection of principal. Correcting this misunderstanding is important for not only those at or near retirement, but also for the next group of retirees that might be 10-15 years from planned retirement age.
To this end, plan sponsors should consider communications and participant education in 2023 focused on the topic of planning for retirement.
This education should help participants to understand topics such as adjusting asset allocation based on expected retirement date, adequacy of savings, risk tolerance, and general financial planning. Further, we believe it is important that the education be delivered by unbiased, non-commissioned educators that are not driven by rollovers or commissions and that it be available at a range of times to fit all employees’ schedules – including early morning and at night. Taken as a whole, this can help those near or at retirement to get back on track and, over the long term, improve employee morale.
5. Legislative and Regulatory Activity
Congress and the Department of Labor (DOL) have been particularly active over the past couple of years.
At the end of 2022, President Biden signed the omnibus spending package which includes the Setting Every Community Up for Retirement (SECURE) 2.0 Act. The Act expands on the SECURE Act 1.0 themes and concepts intended to expand access to retirement plans and make saving for retirement easier for both employers and employees. It also introduced additional initiatives, such as provisions impacting plan distributions. The Act will have widespread implications for the industry and will increase the savings potential for many Americans.
Some of the SECURE 2.0 provisions will take effect on January 1, 2023, such as increasing the required minimum distribution age to 73. Still others will take effect years in the future, such as requiring automatic enrollment for new 401(k) and 403(b) plans, starting in 2025. For most plan sponsors, plan amendments to comply with the Act are not required to be made until the end of the 2025 plan year. There is no doubt that plan sponsors will be focusing on the SECURE Act 2.0 throughout 2023 and working with their plan providers to understand and implement the changes.
Additionally worth noting, the DOL issued a Final Rule addressing how plan fiduciaries may consider the inclusion of relevant Environmental, Social, and Governance (ESG) factors as part of the risk/return analysis when selecting investment options for plan lineups. While the headlines may give the impression that use of ESG factors comes without additional requirements, there are specific provisions in the Final Rule requiring scrutiny.
The Final Rule includes standards for meeting fiduciaries’ Duty of Loyalty and Duty of Prudence should they decide to consider ESG factors. These requirements are broadly described and will require interpretation and proper documentation in their application. We view the Final Rule, on its face, as a door that is cracked open, but not all the way open, for interested plan sponsors. Those that choose to step through the door will need a strategy to comply with the full set of requirements outlined in the Final Rule.
6. Resetting Plan Objectives
Retirement benefits can play an important part in recruiting and retaining top talent. With this in mind, it is important that plan sponsors identify what they want their retirement plan to accomplish for their organization and its employees. The events of the past couple of years have slowed improvements to retirement plans for many organizations as other priorities took precedence. In 2023, we expect more plan sponsors to focus on re-evaluating if their retirement benefits are competitive within their industry and making changes as needed.
Two areas we are seeing of particular focus are plan design and plan communications/employee education. Plan design changes, specifically around highly-marketable features such as employer matching formulas, have become popular as recruiting tools. With regard to plan communication and employee education, much consideration is being given to workforce trends around virtual, in-person, and hybrid workers. For plan communications and employee education to be effective, a mix of in-person and virtual strategies are increasingly necessary to meet employees where they are.
7. Supporting Employees Facing Financial Challenges
The economic hardships experienced by many from the start of the pandemic in 2020 to the high inflation of 2022 forced some plan participants to take loans or hardship withdrawals to cover expenses. Further, some reduced or ceased contributions, especially as inflation rose in 2022. Plan sponsors know that continuous saving toward retirement (and keeping that money invested) helps to drive positive retirement outcomes; conversely, actions that pause saving or prevent savings from benefiting from long-term investment returns can cause less than positive retirement outcomes.
The good news is plan sponsors have a variety of tools that can help participants get back on track. Less intensive options include increasing group and individual retirement education sessions available to employees. More intensive options include re-enrollment at a meaningful default deferral and adding auto-escalation to deferral rates. Aggregate participant data available from recordkeepers can help to identify what degree of intervention is necessary in a given workforce.
Conclusion
Plan sponsors take on tremendous responsibility in helping to manage retirement programs in a way that helps create positive retirement outcomes for participants. We believe these seven priorities can help to focus efforts on areas with the potential to create an outsized impact. For more information or to continue the discussion, please reach out to your PNC Representative.
