How Plans Can Help Challenged Retirement Savers In 2023

As times get tougher for many American savers, retirement plans have to find new ways to help their participants.

In recent years, employers have gotten better at behaviorally motivating workplace retirement participants to save, according to a recent Cerulli report, and this may be in the nick of time as a handful of major financial and political issues shock the system.

“I think 2022 was difficult for retirement plans because there were three or four large events that were all sort of coalescing all at once,” Jack Barry, head of product development at John Hancock Retirement, said in an interview with Financial Advisor magazine. “The average retirement saver was looking for the easy answer to navigate these issues, but there wasn’t one for issues like the volatility we were experiencing, the inflation that people hadn’t been through in over 30 years, and then the global crises, especially the war that erupted in eastern Europe and the tail-end of a global pandemic wave. All those things hit savers, and plans, all at once.”

A mixture of new technology, plan features and rewards for saving are being used to encourage continued participation and saving in defined contribution plans like 401(k)s and 403(b)s, according to “The Cerulli Report—U.S. Retirement Markets 2022: The Role of Workplace Retirement Plans in the War for Talent,” a study published last month by the researcher.

These changes are forcing plan sponsors and recordkeepers—and plans themselves–to evolve.

Making The Most Of A Match
Today, 56% of employers offer some sort of contribution matching policy and do not plan to change their policies over the next 12 months. However, sponsors with a younger workforce were significantly more likely to increase their matching contributions over 2023, according to Cerulli. Roughly one-third of plan sponsors believe that employees would prefer increasing employer retirement plan contributions over a pay bonus.

Financial wellness programs are playing a role as well, according to the research, with benefits like increased productivity and loyalty cited as reasons for offering programs. Participants in financial wellness programs seem most drawn to tools providing education on retirement income plannnig and household budgeting.

“2022 clearly exposed the tradeoffs that people are challenged with—they are expected to set long-term goals and stay the course, while also deal with near-term volatility and the headlines that come out,” said Barry. “They lack the ability to understand what is noise and what is signal—sponsors needed to make these financial education and wellness tools available to help participants weather the storm.”

Sponsors are mostly using measures like website activity, plan participation, contribution rates and assessment test scorers to gauge the effectiveness of financial wellness programs. Cerulli said, but a growing number of firms are also using measures of employee retention and attrition to see how their financial wellness offering measures up.

Make It Easier And Scalable
To access the growing market in smaller defined contribution plans, asset managers will need to emphasize scalability by streamlining onboarding and simplifying plan administration to accommodate employers with fewer resources, according to Cerulli.

Recent research bears this out. Cerulli found that employers sponsoring retirement plans cited cost as the top differentiator for recordkeeping providers, especially for smaller plans. While 23% of all sponsors named cost as their top concern, 31% of small plan sponsors (sponsors of plans with fewer than $25 million in assets) said that cost was a concern. Each group named fund availability as their second most pressing concern.

From the recordkeepers’ point of view, Cerulli found that cost is also a top differentiator for winning business. More than half of recordkeepers, 53%, named costs as their top differentiator in the small plan market.

Sponsors might not be aware of all the defined contribution plan options available to them, according to Cerulli, which found limited awareness of pooled-employer plans (PEP) among 401(k) sponsors. This may be because fewer recordkeepers are working with pooled- and multi-employer plans than the more customary association retirement plans (ARPs).

Cerulli’s research underscored the importance of defined contribution plans and other financial benefits as key to attracting and retaining talent and boosting worker productivity, with more than three-quarters of plan sponsors arguing that robust retirement benefits are effective recruitment and retention tools. The same proportion of sponsors, 75%, state that prospective employees are asking about retirement benefits during the hiring process.

Looking Ahead
In 2023, retirement plans need to do more to address volatility issues, said Barry, and also work more to help job changers keep their assets in plans.

“Today the average person works seven to 10 jobs in their lifetime,” he said. “There are two things that happen there—one, during a job transition, people have access to the assets within their plan and are faced with a make-or-break decision to stay the course within the retirement system or to withdraw their assets. We need to help people to do this, and encourage them to not make a short-term decision with long-term assets.”

Furthermore, job changers are usually forced to “start over” in their new plan, said Barry, and make enrollment, contribution and allocation decisions all over again. With auto-enrollment and auto-escalation attributes already common within plans, participants may also need some sort of auto-transfer attribute where their contribution rate and asset allocation is carried over to a new plan.

“When you join a new plan, we should be making sure that you are set up in terms of investments and the amount you are saving, and that you aren’t taking a step back from where you were at your old employer,” said Barry.