Defined contribution (DC) plans, among other retirement savings vehicles, are the most common ways that US workers save for retirement. DC plan programs in the United States totaled $8.9 trillion in assets as of Q3 2022 and represent 22% of total retirement assets in the country. Plan sponsors thus have a tremendous responsibility to provide and manage retirement benefits on behalf of their employees.
To help plan sponsors, we curated seven topics that we believe are top priorities for retirement programs in 2023.
1. Saving for Retirement: Lower for Longer Investment Expectations
Setting aside the 2022 bear market for equities and most other fixed-income types, capital market assumptions about investment performance over 10-year and 30-year horizons are lower than their historical averages. All else equal, this implies that retirement savers need to save more to build their desired retirement nest egg. This is especially concerning for retirement savers who are unaware of the changing expectations or the resulting need to up their savings rates.
Because retirement savers don’t always know about the dichotomy between past and expected future investment performance, plan sponsors should maximize their communications and prioritize educational methods that encourage increased savings rates. Two specific approaches have succeeded with our clients. The first is high-quality, one-on-one or group financial education. The second is assessing whether a plan’s automatic enrollment and automatic increase deferral percentages are set to appropriate levels given lower-for-longer investment expectations. Reviewing tools, such as retirement calculators, can also be useful to help ensure their settings reflect lower expected returns.
2. Examining the Investment Menu Review Process
Creating and maintaining an investment menu that empowers plan participants to select and build a diversified investment portfolio is among DC plan sponsors’ most important duties. Reviewing the menus should be a regular, well-documented, and ongoing exercise — and not just during or following challenging years like 2022.
In particular, we’ve noticed more plan sponsors want to reaffirm their target date fund (TDF) suite selection or consider a change. As participant demographics evolve over time, does the current TDF remain appropriate? That is a critical question to evaluate. We encourage plan sponsors to integrate guidance from the Department of Labor’s (DOL’s) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” into the review and document the process and outcome. We recommend regular reviews, at least every three-to-five years, and potentially more often when there are material changes to the composition or characteristics of the participant group or to the glide path or composition of the TDF.
3. Driving Employee Engagement through Plan Advocates/Plan Champions
Labor trends and the war for talent are forcing employers to highlight the value and quality of theirretirement benefits. We work with clients to analyze how competitive their plans’ key features are within their industry. With that in mind, even the most competitive DC plan is only as effective as the degree to which employees engage with it.
To bring more employees in, we recommend customizing messaging and communications based on their different knowledge levels and backgrounds. As the Baby Boomer generation nears retirement and Gen Z enters the workforce, workforce demographics are changing — and communication strategies need to adapt to stay relevant.
We also encourage empowering “plan advocates” outside of the HR team who can help champion the plan to other employees. This works especially well when hiring managers are among the plan advocates. They can leverage their plan knowledge both in their recruiting efforts and to retain the teams they manage.
One final note: Statistics show that not all demographic groups are benefiting equally from their DC plans. Better communication methods can help close that gap. Generic, one-size-fits-all messages won’t. Plan advocates with diverse backgrounds, experience, and career levels can help customize messaging in a way that resonates across the organization.
4. Delayed Retirements Due to 2022 Market Downturn
The 2022 market downturn led some individuals to delay or consider delaying retirement. Those who chose to delay need to re-examine and re-affirm their asset allocation or TDF vintage. Industry surveys show that participants have a general misunderstanding about TDFs, particularly around equity risk at retirement age and the protection of principal. Plans sponsors need to clear up this confusion for those at or near retirement or who might be 10 to 15 years away from their planned retirement age.
To this end, plan sponsors in 2023 should consider communications and participant education focused on planning for retirement. This education should familiarize participants with adjusting asset allocation based on expected retirement date, adequacy of savings, risk tolerance, and general financial planning, among other topics. Further, we believe this education is best delivered by unbiased, non-commissioned educators who are not driven by rollovers or commissions. The programs should be available at different times, including early morning and at night, to fit all employees’ schedules. These efforts together can not only help those near or at retirement get back on course; they can also improve employee morale over the long term.
5. Legislative and Regulatory Activity
Congress and the DOL have been actively revising DC plan rules and regulations over the past couple of years. Late in 2022, President Joseph Biden signed the omnibus spending package, which includes the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. The Act expands on SECURE Act 1.0 themes and concepts intended to expand retirement plan access and make saving for retirement easier for employers and employees alike. It also introduced provisions impacting plan distributions, among other initiatives. The Act has widespread implications for the industry and will increase many Americans’ saving potential.
Some SECURE 2.0 provisions took effect on 1 January 2023. The required minimum distribution age rose to 73, for example. Other aspects, such as requiring automatic enrollment for new 401(k) and 403(b) plans, will start in 2025. Most plan sponsors are not required to amend the plan to comply with the Act until the end of the 2025 plan year. There is no doubt that plan sponsors will be focusing on the SECURE Act 2.0 throughout 2023 and working with their plan providers to understand and implement the changes.
Also worthy of note: The DOL issued a Final Rule addressing how plan fiduciaries may consider the inclusion of relevant environmental, social, and governance (ESG) factors as part of the risk/return analysis when selecting investment options for plan lineups. While the headlines may give the impression that use of ESG factors comes without additional requirements, there are specific provisions in the Final Rule that require scrutiny.
The Final Rule includes standards for meeting fiduciaries’ Duty of Loyalty and Duty of Prudence should they decide to consider ESG factors. These requirements are broadly described and will require interpretation and proper documentation in their application. We view the Final Rule, on its face, as a door that is slightly ajar, but not all the way open, for interested plan sponsors. Those that step through the door will need a strategy to comply with the full requirements outlined in the Final Rule.
6. Resetting Plan Objectives
Retirement benefits can help recruit and retain top talent. With this in mind, plan sponsors should identify what they want their retirement plan to accomplish for their organization and its employees. The pace of retirement plan improvements has slowed for many organizations over the last couple of years as other priorities took precedence. In 2023, we expect more plan sponsors will reevaluate their retirement plan’s competitiveness within their industry and make changes accordingly.
Plan design and plan communications/employee education are two areas where we are seeing a lot of focus. Plan design changes around employer-matching formulas, among other highly marketable features, have become popular as recruiting tools. Workforce trends around virtual, in-person, and hybrid workers are also getting considerable attention. For plan communications and employee education to be effective, they need to meet employees where they are. And today, that increasingly means a mix of in-person and virtual strategies.
7. Supporting Employees Facing Financial Challenges
Pandemic- and inflation-related challenges have forced some plan participants to take loans or hardship withdrawals to cover expenses. Others reduced or ceased their contributions, especially as inflation rose in 2022. Plan sponsors know that continuous saving toward retirement (and keeping that money invested) drives positive retirement outcomes. Pausing saving or preventing savings from benefiting from long-term investment returns does just the opposite.
The good news is plan sponsors have many tools to help participants get back on track. Among the less-intensive options are increasing the group and individual retirement education sessions available to employees. More intensive options include re-enrollment at a meaningful default deferral and adding auto-escalation to deferral rates. The aggregate participant data available from recordkeepers can help to identify how much intervention a given workforce may require.
Conclusion
Plan sponsors have a vital task: to help manage retirement programs to create positive retirement outcomes for participants. By focusing on these seven priorities, plan sponsors can direct their resources to where we believe they will have the most positive and outsized impact.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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