Data & Research March 22, 2022

Workers Look Past the Pandemic to Retirement

Many Americans are concerned about the impact that inflation will have on their retirement savings, but despite the general unrest in the workforce, people are growing more optimistic than they were two years ago.

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As Americans look to move forward from the pandemic, many still are concerned they have lost financial ground when it comes to the condition of their retirement plans, according to a study released by Fidelity.

Citing the results of its “2022 State of Retirement Planning” study, Fidelity says that eight in 10 Americans express confidence they will be able to retire when and how they want. However, about a quarter say they are less confident than they were before the events of the past two years. What’s more, 71% of Americans now say they are very concerned about the impact of inflation on retirement preparedness, and almost one-third don’t know how to make sure their retirement savings keep up.

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The study also shows that, despite the general unrest in the world, people are growing somewhat more optimistic about their long-term financial prospects. Almost four in 10 (38%) of next-generation investors, or respondents between ages 18 and 35, say they are more confident than before the events of the past two years regarding their retirement prospects. This is more than twice the number for Gen X respondents (17%). Furthermore, 65% of respondents say 2022 is the year they will put the pandemic behind them and focus on the future, a number that increases to 74% among next-gen investors.

Gen X has the gloomiest outlook on the state of their retirement savings, with more than a quarter (27%) who say their retirement plans have been negatively impacted by the pandemic. They collectively estimate that it may take four to five years to get back on track. This is concerning, as the study notes that the oldest among Gen X are now nearing the qualifying retirement age of 62.

The vast majority of employers are now looking at ways to enhance their defined contribution retirement plans in an effort to boost their employees’ retirement security and financial wellbeing, according to a related Willis Towers Watson survey published this week. Among the many enhancements being considered include allowing employees to direct their contributions to help pay off student loans or to save for financial emergencies.

Overall, WTW’s “2022 Next Evolution of DC Plans” survey shows three in four respondents (75%) that sponsor a DC plan made a change to their plan in the last two years and expect to make at least one change over the next two years. An additional 14% of sponsors that didn’t make a change over the last two years plan to make at least one change over the next two years.

The WTW survey shows that more than one in four respondents (28%) expect to make changes to their plans’ automatic deferral features, while four in 10 sponsors (38%) expect to adopt an innovative contribution strategy. These include allowing participants to use their contributions to reduce student loan debt or directing contributions to an emergency savings fund or a health savings account.

Employers are also exploring ways to integrate their DC plan strategy with enhanced financial wellbeing and resilience support, with roughly four in 10 respondents planning or considering this step on top of 42% having already done so, WTW finds. More than nine in 10 (92%) offer or expect to offer access to personalized support, while 91% use or expect to use targeted communications tailored to specific workforce segments. A similar number offer or expect to offer digital tools to help employees with budgeting and spending.

“Employer interest in helping employees address both their short- and long-term financial concerns has never been greater,” says Alexa Nerdrum, managing director, retirement, WTW. “To that end, employers are refreshing their DC plans to give employees both the opportunity to save more for retirement and the flexibility to use both their personal and employer contributions in innovative ways to manage their financial needs.”

The Fidelity analysis points to the importance of the ongoing “Great Resignation.” Workers increasingly say they are seeking a higher paying job or intending to move into a job more aligned with their values. Others say they are hoping to exit a toxic work environment. While many workers could personally benefit from a career change, the decision to cash out retirement savings early can have a devastating impact on retirement readiness, Fidelity warns.

Among next-gen savers, Fidelity finds that 55% say they put their retirement planning on hold during the pandemic, which is much higher than the general population (41%). Almost half (45%) of the next-gen population don’t see a point in saving for retirement until things return to normal, while 39% now expect to retire later than expected.

In the emerging environment, employers continue to see DC plans as both attraction and retention tools, WTW says. More than half of the survey respondents (55%) expect to have attraction and retention issues over the next two years, with one-third (36%) of those considering their DC plan as an important tool to attract and retain employees.

WTW finds that more than one-third of respondents (35%) that expect attraction and retention issues also expect to differentiate their DC plan from organizations for which they compete for talent. These organizations in particular are looking to enhance certain aspects around the employee experience.

“Employers have a golden opportunity to leverage their DC plan and gain an advantage in attracting and keeping talent,” says Dave Amendola, senior director, retirement, WTW. “Our research shows that employees prioritize flexibility and choice in their benefit package, view retirement benefits as a key reason to join or stay with a company, and want more help from their employer with planning for a financially secure retirement. Employers that enhance their DC plans with features that target these preferences can better meet their employees’ needs while differentiating themselves as a true employer of choice.”

Client Service March 22, 2022

Retirement Plan Asset Flows Can Influence Plan Decisions

A confluence of events has a few plan sponsors seeing more assets distributed from their plans than put into them.

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Retirement plan sponsors are navigating several coalesced challenges that are related and might impact their plans—spiking inflation, market volatility, the potential for large portions of assets leaving the plan due to the so-called “Great Resignation,” as well as the growing number of Baby Boomers entering retirement.

Participants’ swelling account balances from stock market gains in previous years might have masked the urgency for plan sponsors to fortify their plans against the potential for asset losses. The time to act is now, an industry expert says.

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“While not well publicized, there is now, and has been for several years, more money being distributed from plans than being contributed to plans,” says Fred Reish, a partner and chairman of the Financial Services ERISA Team at Faegre Drinker. “That is not obvious because of the significant stock market gains over the past decade. But someday the market will go down, and that dynamic will be exposed.”

Bracing for Exodus

There are other consequences beyond the plan getting smaller when assets exit, explains Katie Hockenmaier, U.S. defined contribution research director, at Mercer. Larger plans have greater buying power and can negotiate lower costs with asset managers and recordkeepers.

“If you see really significant outflows, you could cease qualifying for certain share classes or fee arrangements or vehicles,” Hockenmaier says. “It may also impact their recordkeeping relationship—if they see a certain number of participants or a certain amount of assets pull out of the plan— that could impact the overall fees that they may be paying or passing on to participants.”

Plan size can impact services as “some recordkeepers have tranches of servicing for certain sized clients and that may effectively demote them to a lower group,” she explains.

It’s too early to arrive at any grand conclusions on plan asset impacts from historic COVID-19 workforce and economic dislocations, and the more recent inflation and stock market declines, says Hockenmaier. However, she notes that some manufacturing and technology sector plan sponsors are in a position of asset outflow.

“There is a portion of the industry that is in that position. I would not say quite yet the majority of defined contribution plans, but there are a number of plan sponsors in that situation,” Hockenmaier says. “They tend to be concentrated in certain industries that may be starting to downsize.”

Hockenmaier, who adds that she has not seen significant impacts to plans from the Great Resignation, says she will track several data points to study the trends of assets leaving plans, including any change in the number of participants in a plan quarter over quarter, asset flows, and rollover activity. “When we get to the end of ‘22 it will really be much easier—even midway through this year—to see what impact is being made to plans,” she says.

Futureproofing

Tracking asset flows can inform retirement plan sponsors of any challenges they might have, says Alexa Nerdrum, managing director, retirement, at Willis Towers Watson. “One thing we are seeing is that the pandemic really didn’t lead to some of the mass distributions plan sponsors and others were expecting,” she says.

An estimated 2% to 4% of participants made retirement account withdrawals after passage of the Coronavirus Aid, Relief, and Economic Security—or CARES—Act provided for special distribution and loan rules for retirement plans and individual retirement accounts, according to Nerdrum. Meanwhile, savings rates and plan balances have continued to grow, she says.

To keep assets in plan, encourage savings and attract talent, plan sponsors have bolstered plan design features—adding lifetime income options and the ability to repay student loans and save for emergencies. Plan sponsors are shifting their focus, as “attraction and retention has become a significant issue of late for a lot of plan sponsors, [and] a lot of our clients,” Nerdrum explains.

Plan sponsors can use data on what groups of individuals take loans and hardship withdrawals, and who is maximizing or not maximizing their deferrals, to know what plan design features will meet participants’ needs, Nerdrum says.

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