24% of Participants May Cut 401(k) Contributions

High cost of living and fears of a recession may be driving consumers to make bad decisions with their workplace retirement savings plans and finances in general, according to a new study from Nationwide Mutual Insurance Co.’s retirement institute.

To offset inflation, 37% of respondents are considering increasing their credit card debt to stay afloat; 24% are thinking about reducing their retirement plan contributions; 21% are considering taking or have already taken out a loan, according to a multiple response question in an April survey of 2,000 adult consumers conducted by the Nationwide Retirement Institute.

Meanwhile, 57% of consumers have tapped into savings in the past 12 months to pay for everyday expenses, with Gen Z (born from 1997 through 2012) and Millennial (1981 through 1996) consumers doing so at the highest rates, 64% and 66%, respectively, according to the report.

These short-term tactics may erode the financial future for many consumers, who may not realize the resources and help available to them through workplace retirement plans, says Kristi Martin Rodriguez, senior vice president of the Nationwide Retirement Institute.

“Part of the problem is that participants tend to think of their 401(k) plan as a merely a savings vehicle,” Rodriguez says. “The truth is, it’s likely their plan offers more than just a means of accumulating savings. In many cases, plans offer free advice and planning tools and, in some cases, a means for turning their savings into a predictable stream of income in retirement.”

Rodriguez, who led the study for Columbus, Ohio-based Nationwide, says a good recordkeeper will be communicating with participants about financial education and tools available to them. Meanwhile, retirement plan advisers can work with the plan sponsor and participants on how to leverage these tools.

“Advisers can complement their own tools and resources with those offered by the plan’s recordkeeper to support participants with their day-to-day planning needs,” she says. “They can also partner with the recordkeeper and plan sponsor to develop a comprehensive strategy for creating visibility of these resources among employees and participants.”

Recession Concerns

Consumers may be acting cautiously with their money due to fears of a financial pinch in the near future, according to the survey findings. Of those surveyed, 68% expect a recession within the next six months, and nearly 80% of those expect it to be severe.

Due in part to this fear, positive consumer sentiment about the economy has fallen to only 16% of consumers, according to Nationwide, down from 24% last year. That decline in sentiment is matched by a drop in consumers citing positive feelings toward their own personal finances, which clocked in at 39% of those surveyed, down from 47% last year.

In the event of a recession, most consumers showed concern about their retirement saving and outcomes. According to a multiple response question from Nationwide, 52% of consumers were worried about their ability to save for retirement, 52% were worried about their retirement account losing value and 42% have concern about their ability to retire on time if a recession hits.

“It’s not surprising that people are feeling anxious,” Rodriguez says. “It’s important for advisers and financial professionals to understand the emotions their clients are feeling right now as a first step to helping them stay focused on their long-term financial plans.”

Communication is Key

Rodriguez notes that provisions in the SECURE 2.0 Act of 2022 can help bolster retirement savings. She points in particular to the creation of emergency savings vehicles that allow up to $1,000 per year for plan participants who need help covering “unexpected expenses like a car repair or medical bills.” She also calls out the potential for employers to offer a match for participants making payments on student loan debt.

The success of these and other programs, however, relies in part on communicating to participants, according to the retirement institute head.

“A good recordkeeper will bring a strong communications strategy for helping participants understand these resources, but there’s also a huge opportunity for leaders of the company to be more deliberate about encouraging employees to engage with these communications to understand their options,” she says.

Getting people’s attention, however, may continue to be a challenge, according to the survey results. Most consumers, especially of younger generations, are turning to advice from friends and family, online resources, prayer and social media, according to Nationwide.

Only 30% say they are working with a financial adviser, with the other 70% citing cost (46%), not having enough assets to make financial advisement worth it (37%), not knowing who to go to (22%) and not believing they need advice (21%) as reasons why. Meanwhile, about one-third of all respondents (31%) said ChatGPT will provide better financial advice than a human adviser in the next five years, with that percentage at 37% for Gen Z and 43% among Millennials.

Rodriguez says today’s moment of fear can be one for financial professionals to engage with consumers.

“There can be a real temptation for consumers to retreat or even surrender when the financial news cycle seems so challenging,” Rodriguez says. “The first step for advisers is understanding where their clients are coming from by listening with empathy. That can set the stage for a more collaborative conversation about steps to keep them on track.”