Capital Group: Now is Optimal Time to Sell Retirement Plans

The Secure 2.0 Act of 2022 is expected to result in an increasing number of businesses migrating to retirement plans, which in turn means there has never been a better time to sell retirement plans, according to industry experts from Capital Group.

A Tuesday webinar hosted by the owner of American Funds examined key themes influencing plan business in 2023, particularly focusing on tailwinds from Secure 2.0 and state retirement plan mandates. Jonathan Young, senior national accounts manager at Capital Group, argued in favor of offering retirement plans even amid market volatility.

“They’re sticky assets,” said Young. “Good market, bad market, the checks keep coming in.”

Capital Group experts said that Secure 2.0 will prompt plan creation through things such as auto-enrollment and auto-escalation in new plans. Plans will be required to auto-enroll employees at a 3% minimum, with auto-escalation of 1% annually up to between 10% and 15%.

They also noted that state mandates will create opportunities for retirement plans. Currently, state-sponsored retirement savings plans are mandatory in 12 states, voluntary in four and efforts underway in 30. Four states—Alabama, Florida, South Dakota and Alabama—have made no recent efforts in creating mandates.

Secure 2.0 also allows companies to offer an emergency savings account linked to an employee’s retirement savings plan, the experts noted.

“If you employ a lot of low-wage earners and they have one car and it breaks, how do they go to work? How do they get paid?” Young asked. “The ripple effect is not good for the employer. … Many lower earners are not participating in retirement plans because they can’t afford to.”

Employers will also be able to make retirement account contributions that match employees’ “financially crippling” student loan payments, Young noted. Research from 2022 looked at what would happen if student loan debt had been invested in a 401(k) with a 6% annual return compounded monthly. Given an average student loan debt of a 2021 college graduate, $31,000, the balance at age 65 with a 50% match would be $553,296.

Plan sponsors’ interest in pooled employer plans, designed to create lower-cost retirement plan programs for small businesses, remain modest, the experts said. According to data from the fourth quarter of 2020, disinterest in PEPs ranged from 47% reported by mid-sized plans (between $25 million and $250 million in assets) to 72% reported by mega-sized plans (greater than $1 billion). In 2021, 56% of registered investment adviser field professionals had not offered PEPs.

Retirement income solutions, which could include annuities or withdrawal strategies, will also continue to expand, according to Capital Group’s panel. Research from 2022 found that one in five retirement professionals actively recommend income solutions. Twenty-one percent said they currently recommend them, 48% said they don’t right now but are likely to recommend them in the future.

Craig Duglin, a senior product manager at Capital Group, said retirement income product solutions will be in demand: “More participants are staying in plans. They’re going to need solutions. They’re going to need services.”

Capital Group owns American Funds, the largest defined contribution only investment provider by recordkeeping partners, according to the 2022 PLANADVISER DCIO survey.