Market Downturn May Drive Millennials to Cash Out Retirement Plans

New retirement research shows that plan participants are increasingly growing frustrated in today’s market. 

Retirement plan participants are frustrated by prevalent market volatility and fearful of a significant market slump, according to new research.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The Cogent Syndicated DC Participant Planscape report from Escalent shows that in the event of a market downturn—in which the major market indices decreased 10% or more—61% of Millennials will likely liquidate their retirement plan assets, pay taxes to withdraw and any applicable penalty, compared to 35% of Gen Xers, and 26% of Baby Boomers.  

Millennials are spooked by market volatility and fears of increased inflation above other generations in the survey: Gen X, 2nd Wave Baby Boomer, 1st Wave Baby Boomer and the Silent Generation (born 1928-1945). With more time to save and invest for retirement, anxiety and fear among Millennials can cause participants to be vulnerable to concerns affecting their ability to save for retirement, the report finds.  

The research shows that 73% of active defined contribution plan participants are Millennials and Gen Xers, compared to 50% in 2020 and 54% in 2021. 

Millennials and Gen X participants “are primed to be more reactive than their older peers, underscoring the necessity for providers to offer guidance and reassurance,” the report states.

Sonia Davis, senior product director at Escalent, says in a press release that plan sponsors must react with bolstered financial wellness and planning resources for participants.  

“These findings underscore the overarching need for increased education and investment guidance, especially as anxiety around market volatility and inflation persist,” she says. “Retirement plan providers and investment managers play a critical role quantifying retirement savings goals, connecting participants with resources to ensure confidence, and ultimately, encouraging them to stay committed to the long game for their personal financial betterment.”

Among all survey respondents, 27%—the most frequent—say concerns about market volatility are the reason for decreasing their retirement plan contributions. Less income is the prompt for 21%, followed by needing to pay down debt or bills (19%) and needing money for everyday expenses (18%).  

In the event of a 10% market downturn, among all generations of retirement plan investors, 62% would be extremely likely to talk to their financial adviser, 54% to contact their retirement plan representative, and 53% to decrease their risk tolerance from aggressive to moderate, the report finds. 

The report suggests that plan sponsors may be able to mitigate increased retirement anxiety—from market volatility and recession fears—with financial tools for participants, that can provide guidance and a measure of reassurance.

“This [is] an opportunity for firms to quickly intervene and provide guidance and reassurance to plan participants,” the report states. “Financial wellness programs have proved instrumental in creating more confidence and retirement readiness, with users citing significantly higher confidence rates in achieving their retirement savings goals.”

The report finds users of financial wellness programs have higher confidence in their ability to achieve retirement savings goals, as 35% of users are “extremely confident,” compared to 17% for non-users.

Millennials and Gen Xers show the most confidence, because the “levels are most pronounced among Millennials (42% of users vs. 15% of non-users) and Gen Xers (30% of users vs. 15% of non-users),” the report finds.

The research was conducted by Cogent Syndicated, a division of Escalent, from May 10 to June 1. The online survey gathered responses from 4,011 defined contribution plan participants, 18 years of age or older, contributing at least 1% to a current retirement plan and/or have $5,000 or more in at least one former plan.

Proposed Legislation Would Ban Mandatory Arbitration and Discretionary Clauses

The Mental Health Matters Act would, among other things, ban forced arbitration clauses, class action waivers, discretionary clauses, and representation waivers in ERISA-governed plans.


The Mental Health Matters Act passed the House in late September by a vote of 220 to 205.

The bill, which was initially proposed in the House in May, would amend the Employee Retirement Income Security Act to make mandatory arbitration clauses unenforceable. This means that benefits plans would be banned from requiring predispute arbitration as a condition of joining the plan. The bill would also eliminate discretionary authority for plan administrators in providing benefits.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Title VII of the bill renders forced arbitration clauses, class action waivers, discretionary clauses, and representation waivers unenforceable for the purposes of benefits governed by ERISA. Beneficiaries may still consent to arbitration after a dispute arises however, as long as the following conditions apply: the participant was not coerced into agreeing to arbitration, the participant must be informed in writing of their right to refuse to agree without retaliation, and they must have a 45-day waiting period to agree to arbitration.

Plans would have one year to comply with the regulations.

Other sections of the bill would increase funding for mental and behavioral health care in schools.

Lastly, the bill would empower the Department of Labor to bring more civil actions to enforce the Mental Health Parity and Addiction Equity Act which requires insurers to provide the same mental and behavioral health benefits that they provide for medical and surgical claims. Specifically, the bill would authorize $240 million to the Employee Benefit Security Administration and $35 million to the DOL’s Solicitor General’s office over 10 years for this purpose.

Support and Opposition

The Biden Administration has come out in public support of the bill, suggesting that President Biden would sign it if it passes the Senate.

“H.R. 7780 will strengthen the provision of affordable mental and other health care by authorizing critical tools and resources for the Secretary of Labor to enforce provisions of the Employee Retirement Income Security Act, including those added by the Mental Health Parity and Addiction Equity Act of 2008. And it will help prevent Americans from being improperly denied mental health and substance use benefits by ensuring a fair standard of review by the courts and banning so-called forced arbitration agreements. The Administration urges the House to pass the Mental Health Matters Act of 2022.”

The American Hospital Association also supports the bill on the grounds that forced arbitration agreements limits access to a “fair standard of review by the courts.”

The Morgan Lewis law firm cautioned that this would encourage more costly litigation and frivolous suits, since many weaker cases are filtered out by the more expedited arbitration process.

The US Chamber of Commerce has also voiced opposition to the bill. It likewise notes that it will encourage more litigation and that employees tend to be more successful in arbitration than in court proceedings in both case victory and award size, though beneficiaries would have the option to seek arbitration. Rep. Matt Gaetz (R-FL) also noted that data showing higher plaintiff success rates in arbitration likely does not account for private settlements that arise as a result of bringing a formal lawsuit.

Similar Legislation

There are some precedents for this legislation in both state and federal law. For example, California already bans discretionary clauses for long-term disability insurance.

In March of this year, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which would enable victims of sexual assault and/or harassment to file their claims in court instead of being forced to participate in arbitration.

Consumer Reports has also come out in support of similar legislation in other contexts. It notes that forced arbitration clauses place ordinary consumers at a disadvantage, and support the Forced Arbitration Injustice Repeal Act, introduced in the Senate in March 2021, which would ban mandatory arbitration in an employment, consumer, anti-trust or civil rights dispute.

While the Mental Health Matters Act passed the House Sept. 29, it does not appear to have been debated yet in the Senate.

The text of the Mental Health Matters Act is available here.

 

 

 

 

«