In Practice November 14, 2023

Fewer Than Half of Workers Plan to Review Retirement Plan Contribution

Corebridge experts recommend employees take advantage of this month’s open enrollment to expand their retirement savings. 

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This open enrollment benefits season finds fewer than half of employees with a better outlook for their retirement savings than last year, but that is not prompting them to reconsider contributions, according to a recent survey released by Corebridge Financial and Morning Consult. 

“As employers identify employee communication strategies about retirement plans during the open enrollment period, but also throughout the year, it’s important that employers are monitoring the plan’s overall health, including reviewing such measures as participation and contribution rates,” Corebridge’s Terri Fiedler, president of retirement services, said via email. “Through these efforts, employers can define and monitor plan goals, identify trends and make informed decisions on actions that can help improve plan engagement.” 

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Only 41% of respondents reported an improved retirement outlook compared to last year, according to the survey released November 9. Meanwhile, 44% of workers said they would assess their contribution to their retirement plan, with even fewer (34%) planning to review their employer’s contribution and just 31% intending to evaluate their progress toward meeting their retirement goals. Those areas would all be a way for employees to address retirement security concerns and are actions, Fiedler recommended in a statement with the report.  

“Your employer’s open enrollment period is an opportune time to review your retirement plan holistically, identify gaps and needs, ensure you’re maximizing your employer’s contribution matching programs and take actions that will help achieve the retirement you envision,” Fiedler said. 

For those not planning to review or modify their employer-sponsored retirement plan during open enrollment, the most common reason cited was lack of consideration (27%), underscoring an opportunity for employers and financial professionals to engage employees on workplace retirement benefits, Corebridge reported.  

The survey results also highlighted gendered differences on retirement readiness, with women (33%) less likely than men (48%) to report an improved retirement outlook. Compared to other generations, Millennials in particular expressed optimism, with more than half (51%) feeling positive about retirement. 

According to Corebridge, there is a clear opportunity for both employees and employers to take action during open enrollment, which typically happens in November but varies by employer. Many employees, for example, can increase their retirement plan contributions: 45% of those surveyed plan to raise their contribution by 1% or more, according to the report.  

Corebridge also suggested workers should meet with a financial professional, a practice endorsed by 78% of participants and increasingly embraced by younger generations. 

“One of the most helpful ways employers can ensure employees are thinking about their retirement plans during the workplace open enrollment period is to engage them throughout the year,” said Fiedler via email. 

For employers, this can include sending targeted and personalized emails, as well as offering employees retirement education and planning resources that enable them to take actions– whether that’s utilizing digital planning tools, attending webinars and workshops, or meeting with financial professionals, she said.  

When enrollment season comes around, employees can be better prepared to evaluate not only where they are in their retirement journey, but how all of their benefits tie together. For example, if employees have disability coverage offered through their workplace, Fiedler said they should be considering how that can help them protect their retirement savings from unexpected events. 

“That said, when employers are developing their annual enrollment communications, we’d encourage them to include understandable, digestible information and reminders about retirement plans among all other benefits, such as details about enrolling in the plan, designating or reviewing a beneficiary or increasing their contribution,” suggested Fiedler.  

Conducted by Morning Consult between October 18 and 23, the survey involved a national sample of 2,312 working adults, with results from the total sample having a margin of error of two percentage points. 

Data & Research November 14, 2023

Morningstar Ups Safe Starting Retirement Withdrawal Rate to 4%

Higher fixed-income yields and lower long-term inflation estimates led to Morningstar raising the starting retirement withdrawal rate from last year’s 3.8%.

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Morningstar Inc.’s base case ‘safe’ withdrawal rate for retirement savers has crept up for the third consecutive year since the firm started the analysis, returning to what had long been held as the common benchmark of starting retirement drawdown by withdrawing 4% of assets per year, adjusting each year thereafter to account for inflation.

The investment services firm made news in 2021 when it issued its first report of a recommended starting retirement withdrawal rate of 3.3% for a balanced savings portfolio over a 30-year retirement. That time now feels like another world, back when interest rates were low and inflation had only recently started rising.

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By 2022, the picture had changed dramatically, and Morningstar moved to recommending a 3.8% withdrawal rate based on higher interest rates and lower equity valuations. In its latest analysis released Monday, the firm moved to a 4% starting withdrawal rate for a portfolio starting with a balance of $1 million and a conservative portfolio of 20% to 40% in equities and the remainder in cash and fixed income.

That starting withdrawal rate would yield a 90% probability of having funds remaining at the end of a 30-year period, assuming the retiree would adjust for inflation each year either by adjusting the withdrawal rate or by using inflation-protected savings strategies.

Long-term Treasury yields that recently were hovering at a decades-long high were the key driver of the boost, says John Rekenthaler, Morningstar’s director of research. “The bond estimates went up fairly aggressively, because long-term bond returns tend to be what the current yield on the 30-year Treasury is—they don’t range that far away.”

Morningstar noted that Treasury inflation-protected securities, or TIPS, were yielding 4.6% at the time of publication and are guaranteed.

If Treasury yields drop dramatically over the next 12 months, that may change the ‘safe’ base case once again, Rekenthaler says. But there also may be other factors coming into play, such as a more bullish stock market valuation, so it will depend on the larger market environment to determine next year’s figure.

The lower inflation adjustments, though a factor, were not as dramatic, Rekenthaler says, with Morningstar basing the models on a 2.42% inflation rate this year, as compared with a 2.84% rate in 2022.

The withdrawal rate recommendation is slightly lower, 3.9%, for a portfolio with 50% equities and 50% bonds and cash, Morningstar noted, due to equities potentially having more volatile returns.

Looking Forward

The ‘right’ withdrawal rate by the firm takes into account three key variables: “the market environment that prevails over a retiree’s drawdown period, the length of the drawdown period, and the portfolio’s asset allocation.”

Unlike other withdrawal rate analysis that looks backward at historical outcomes, Morningstar’s report uses forward-looking forecasts created by Morningstar Investment Management. In the base case assumption, most savers will end up with money left over after 30 years. But fixed-income-heavy modelling is not a recommendation of how to invest, Rekenthaler notes.

“When we recommend 20-40% equity, we’re saying that when we run the numbers, that gets you to safe withdrawal rate,” he says. But the 3.9% in a 50/50 portfolio is “very close to 4% and may yield a higher balance at the end of the term.”

The reason for considering a more conservative drawdown scenario is, in part, because when withdrawing from a portfolio, “volatility is quite dangerous,” Rekenthaler says. “It doesn’t matter if you’re investing in a portfolio from a buy-and-hold perspective … but it’s another thing when you are pulling money out of a portfolio.”

Guaranteed Returns

Morningstar’s new report also ran analysis of guaranteed income options for the first time, considering an income option to supplement savings and Social Security.

The impetus for that analysis was to consider how retirement savers can set themselves to meet fixed or set needs via guaranteed income options, Rekenthaler says. Another reason was the 100% guaranteed rate TIPS are generating now, as opposed to in the past.

“If the yields on TIPS are sufficiently attractive, their safe withdrawal rates can exceed those provided by other investment portfolios,” Morningstar’s researchers wrote in the report.

If a retirement saver implemented a solely TIPS-based investment strategy, it would bump a ‘safe’ starting withdrawal rate up to 4.6% but would leave no assets remaining after 30 years, according to the analysis.

Other strategies for boosting guaranteed income would be delaying Social Security distributions to maximize payout or adding retirement income annuities. Morningstar’s report did not analyze the use of annuities but noted it plans to include them in future analyses.

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